The price paid for the right but not the obligation to buy or sell futures contracts is called which term?

The price paid for the right but not the obligation to buy or sell futures contracts is called which term?

• A. Premium
• B. Basis
• C. Forward price
• D. Strike price

Answer: (A)

When you buy the right but not the obligation to buy or sell futures, you pay a price for that right called the premium. This premium is the upfront cost to obtain an option on futures, giving you the choice to exercise if market prices move favorably, while your risk is limited to the amount of the premium. The other terms don’t fit this description: basis is the difference between cash and futures prices, forward price is the agreed price for a forward contract (not an option), and strike price is the exercise price at which you could buy or sell the futures if you choose to exercise, not the price you pay for the option itself.

When you buy the right but not the obligation to buy or sell futures, you pay a price for that right called the premium. This premium is the upfront cost to obtain an option on futures, giving you the choice to exercise if market prices move favorably, while your risk is limited to the amount of the premium.

The other terms don’t fit this description: basis is the difference between cash and futures prices, forward price is the agreed price for a forward contract (not an option), and strike price is the exercise price at which you could buy or sell the futures if you choose to exercise, not the price you pay for the option itself.