If a call option is out-of-the-money, the:
Answer(s): B
When the value of the asset underlying a call option is less than the exercise price of the option, the option is out-of-money.
A call option on an ordinary share is more valuable when there is a lower:
The lower the exercise price, the more valuable the call option. The exercise price is the price at which the call holder has the right to purchase the underlying share.
The type of option that does not have the backing of stock is called a(n):
Answer(s): C
A naked or uncovered option is a call option that does not have the backing of stock. Thus, the option writer will have to purchase the underlying stock if the call option is exercised.
A contractual arrangement that gives the owner the right to buy or sell an asset at a fixed price at any moment in time before or on a specified date is a(n):
Answer(s): D
An American option is a contractual arrangement that gives the owner the right to buy or sell an asset at a fixed price at any moment in time before or on a specified date.
The use of derivatives to either hedge or speculate results in:
Derivatives, including options and futures, are contracts between the parties who contract. Unlike stocks and bonds, they are not claims on business assets. A futures contract is entered into as either a speculation or a hedge. Speculation involves the assumption of risk in the hope of gaining from price movements. Hedging is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements.
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