[amp_mcq option1=”Swap” option2=”Futures” option3=”Forward” option4=”Options” correct=”option4″]
The correct answer is D. Options.
A swap is an agreement between two parties to exchange cash flows in the future based on a predetermined formula. A futures contract is an agreement to buy or sell a specified asset at a specified price on a specified date in the future. A forward contract is similar to a futures contract, but it is not traded on an exchange. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a specified price on or before a specified date.
In the given example, Party A has a right to buy USD 6,000 from Party B, 1 month down the line, at Rs. 46 = 1 USD. This is an option contract. Party A has the right, but not the obligation, to buy USD 6,000 from Party B at Rs. 46 = 1 USD. If Party A does not exercise the option, then Party A does not have to buy USD 6,000 from Party B.
A swap, futures contract, and forward contract are all binding agreements. If Party A enters into a swap, futures contract, or forward contract, then Party A is obligated to fulfill the terms of the contract. In the given example, if Party A enters into a futures contract to buy USD 6,000 from Party B, then Party A is obligated to buy USD 6,000 from Party B, even if the price of USD falls below Rs. 46 = 1 USD.
Therefore, the only contract that allows Party A to not exercise the right is an option contract.