Series 7 practice questioneasyOptions — Index Options
Index options are settled in which of the following ways?
- APhysical delivery of the underlying securities
- BDelivery of index futures
- CDelivery of an ETF
- DCash settlement✓ Correct answer
Explanation
Why D — Cash settlement
Index options are cash-settled, meaning that upon exercise, the holder receives the difference between the index value and the strike price in cash. It would be impractical to deliver all the stocks in an index, so cash settlement is used instead of physical delivery.
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