[amp_mcq option1=”(R) is correct and (A) is wrong” option2=”(A) is correct and (R) is wrong” option3=”Both (A) and (R) are correct” option4=”Both (A) and (R) are wrong” correct=”option3″]
The correct answer is: C. Both (A) and (R) are correct.
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. The seller of the option, also known as the option writer, is obligated to fulfill the terms of the contract if the buyer exercises the option.
The liability of the option buyer is limited to the premium paid for the option. If the buyer does not exercise the option, they lose the premium. However, if the buyer does exercise the option, they are obligated to pay the strike price to the option writer.
The option buyer need not exercise the option if the exchange rate is not favorable for them. In this case, they can simply let the option expire and lose the premium they paid.
Therefore, both (A) and (R) are correct.