The terms exercise price and premium relate to which derivative?

• A. Option
• B. Future
• C. Swap
• D. Forward

Answer: (A)

These terms belong to an option. The exercise price, also known as the strike price, is the fixed price at which the holder can buy (call) or sell (put) the underlying asset if they choose to exercise the option. The premium is the upfront payment the buyer makes to acquire that right—the price of the option itself. If the option is exercised, the strike price is used in the transaction; if not, the option may expire worthless, and the premium is the seller’s income.

Futures and forwards, by contrast, are agreements to transact at a future date at a price specified in the contract, but they do not involve paying an upfront premium for a right to buy or sell. Swaps involve exchanging cash flows and also do not include an exercise price or a premium in the same sense as options. That’s why these terms point to the option.