In Regards to the Mechanics of Trading Futures Options, Which

question 63

Multiple Choice

In regards to the mechanics of trading futures options, which of the below statements is FALSE?

• A) The exchange imposes margin requirements for the buyer of a futures option once the option price has been paid in full.
• B) Because the maximum amount the buyer can lose is the option price, regardless of how adverse the price movement of the underlying instrument, there is no need for margin.
• C) Because the writer of an option has agreed to accept all of the risk of the position in the underlying instrument, the writer is required to deposit not only the margin required on the interest rate futures contract position if that is the underlying instrument, but, with certain exceptions, also the option price that is received for writing the option.
• D) If prices for the underlying futures contract adversely affect the writer's position, the writer would be required to deposit variation margin as it is marked to market.

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Definitions:

Type I Error

The error of rejecting a true null hypothesis, also known as a false positive.

Alpha

Often denoted as α, it is a significance level used in hypothesis testing, representing the probability of rejecting a true null hypothesis.

Alpha

A term often associated with the significance level in hypothesis testing, indicating the probability of rejecting a true null hypothesis.

Type II Error

The error occurs when the null hypothesis is not rejected when it is actually false.