In case Future buyer upon contract maturity is in a comfortable situation and chooses to exercise it.
Will he obtain the underlying asset from the seller or will he only receive the profit?
Also, does this mean that Future seller must definitely own the underlying asset in his name (so that he can deliver the asset upon maturity) or is there another way?
Also, explain if option sellers also own the underlying assets in their names.
Also, why the concept of leverage in cost of carry model is not visible in Option premium determination as option buyers also enjoy leverage?
When you enter into a futures contract, you agree to buy or sell a specific asset at a future date and price. So, if you are the buyer of a futures contract, you will receive the underlying asset upon contract maturity from the seller, not just the profit.
For example, if you enter into a futures contract to buy 100 barrels of oil at $80 per barrel in three months, then upon maturity, you will receive 100 barrels of oil from the seller and pay $80 per barrel.
For the seller to deliver the underlying asset, they must either already own it or have a way to acquire it before the delivery date. This varies depending on the market and the asset being traded.
When you sell an option, you are obligated to buy or sell the underlying asset at a specified price if the buyer chooses to exercise the option. You receive a premium for selling the option, but you do not necessarily own the underlying asset.
For example, if you sell a call option to sell 100 shares of Apple stock at $150 per share and the buyer chooses to exercise the option, you will need to buy 100 shares of Apple stock at the current market price and sell them to the buyer for $150 per share.
Finally, the cost of carry model is a way to determine the price of a futures contract, taking into account factors such as the cost of financing and storing the underlying asset. This affects the price of the futures contract, but it is not directly factored into the price of an option. The cost of an option is determined by factors such as the price of the underlying asset, the strike price, the time until expiration, and market volatility. While leverage can affect the value of an option, it is not explicitly factored into the option premium calculation.