Which of the following derivatives positions is least accurately characterized as a legally binding obligation? A. Short position in an equity call option. B. Long position in an interest rate put option. C. Long position in a commodity futures contract. D. Fixed-rate receiver position in an interest rate swap Answer is B, I chose D. Aren’t interest rate swaps OTC agreements, so not legally binding unlike options which are often exchange traded?
You’re not obliged to exercise your option. Swaps are regulated by the law even though they are OTC, failure to deliver will get your ass in court. Just watch out for the word “obligation”.
Wel, the explanation for B, it is a put option, implying you have the RIGHT, not obligation to exercise it (although many brokerage houses will force you to exercise if you are in the money by a certain amount). Interest rate swaps are agreed upon at the initiation of the contract, therefore it is a legally binding contract (forward commitments). Remember, options give rights given to the investor who is long (and paid his/her premium) whereas interest rate swaps are forward commitments agreed upon on terms at the initiation of the contract that are legally binding.
meazza beat me to it Ok back to FSA. Man, do I ever suck at SS 9
A is an option too. That’s not an obligation either is it? Why can’t the answer be A?
A short call is obliged to deliver if the long exercises.