General Securities Representative (Series 7) Practice Exam

In exercising index options, who is the party that pays the buyer of the options?

1. Exchange

2. Investor

3. Seller

4. Buyer

The correct answer is: Seller

In the context of exercising index options, the seller of the options is responsible for paying the buyer. When an index option is exercised, the buyer has the right to receive payment based on the difference between the strike price of the option and the current value of the index at the time of exercise. The seller, who has written the option, must fulfill this obligation by providing the financial compensation to the buyer as stipulated in the options contract. Index options are cash-settled contracts, meaning that they do not involve the transfer of the underlying asset but instead result in a cash transaction. The payment made to the buyer by the seller is calculated based on the intrinsic value of the option at the time of exercise. This obligation ensures that the risk and reward balance in the options market, with sellers potentially facing losses if the market moves unfavorably for them.