An option in which the underlying rate or price is linked to a commodity index. The performance and final payout of the option contract is tied to a certain commodity index, which is typically calculated on the basis of the prices of respective, individual commodity futures. The payout may also be calculated based on the excess return variant of the underlying index.
For a call option (commodity index call option), the holder (buyer of the call) has the right to receive the difference between the execution price (strike price or exercise price) of the option and the final settlement price of the options series (cash settlement)- of course, when the latter is higher than the former and the premium combined.
The writer of a call is obliged, if the option is exercised, to settle in cash the difference between the strike price of the option and the final settlement price of the options series. The final settlement price is determined on the strike day of the contract.
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