A futures contract shares many of the same characteristics as a financial option

Question

A futures contract shares many of the same characteristics as a financial options contract. What is the primary difference between the two types of contracts?

An option contract conveys the obligation to take delivery of the underlying security at maturity. With the purchase of a futures contract there is no obligation to take delivery at maturity.

An option contract is always in "in the money" while a futures contract can be both "in the money" and "out of the money" depending the futures contract strike price

The purchase a financial options contract conveys the right but not the obligation to exercise at any time prior to maturity. A futures contracts, on the other hand, conveys an obligation to take delivery at expiration. However both types of contract can be bought or sold prior to maturity.

An option contract can be used to hedge price risk in the underlying security while a futures contract is only used to hedge premature expiration risk much like an insurance contract.

Explanation / Answer

Ans: A future contract is having an obligation to deliver and buying an option does not give an obligation to execute the contract., So, first option is wrong.

Options can be both in the money and out of the money option, infact option can be at the money but not the future contracts. So, 2nd option is also wrong.

Option and futures both are used to hedge price risk of underlying security , option 4 is also wrong.

Option 3 is correct. i.e Option and futures can be bought and sold prior to maturity, while former gives no obligation and latter is an obligation to execute.

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