Ch20 1_ Option Markets

Which of the following best describes an option?

• A right and an obligation to buy or sell an asset in the future

• A financial instrument whose value depends on another asset

• A guaranteed way to make profits in stock markets

• A type of government bond

A call option gives the holder the right to:

• Buy the asset at the strike price

• Sell the asset at the strike price

• Buy the asset at the market price only

• Sell the asset only on the expiration date

A put option is valuable when:

• The stock price goes above the strike price

• The stock price goes below the strike price

• The stock price equals the strike price

• The premium is zero

• At the money (ATM)

• Out of the money (OTM)

• In the money (ITM)

• Worthless

Which of the following is an example of using options for hedging (not speculation)?

• A trader buys calls on Tesla to bet on a price increase.

• An airline buys oil call options to protect against rising fuel costs.

• An investor buys puts to profit from a market crash.

• A speculator sells options to collect premiums.

What is the maximum loss for a buyer of a call option?

• Unlimited

• The stock price minus the strike price

• The premium paid

• Zero

Options are considered “derivatives” because:

• They have a maturity date.

• They are traded on exchanges.

• Their value is derived from another asset’s price.

• They can be used for speculation.