19.03.2023 - 16:14

An investor who exercises a call option on an index must a. accept the cash difference between the index and the exercise price b. purchase all of the stocks in the index in their appropriate proportions from the writer c. immediately buy a put option t

Question:

An investor who exercises a call option on an index must

a. accept the cash difference between the index and the exercise price

b. purchase all of the stocks in the index in their appropriate proportions from the writer

c. immediately buy a put option to offset the call option

d. immediately write another call option to offset

e. none of the above

Answers (1)
  • fishkaNEO
    April 2, 2023 в 21:09

    The correct answer is (a) accept the cash difference between the index and the exercise price.

    When an investor exercises a call option on an index, they have the right to buy the underlying assets of the index at a predetermined price (known as the exercise or strike price) at or before the expiration date of the option.

    In the case of an index option, however, the underlying assets are the stocks that make up the index, which can be difficult to purchase in their appropriate proportions. As a result, the settlement of index options is usually done in cash rather than in the physical delivery of the underlying stocks.

    So when an investor exercises a call option on an index, they will receive the cash difference between the index value and the exercise price from the option writer. This is known as the "cash settlement" of the option.

    Therefore, (a) accept the cash difference between the index and the exercise price is the correct answer.

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