Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Contract

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Suppose you are interested in buying 100 shares of WePro Ltd. and the current price of its stock is $30. You are thinking to buy these shares at $32 from the stock exchange market. In case the market price is above $32, you buy the shares at $32 and you agree to pay the stock exchange market $2 for each share, or $200 in total. If the market price is below $32, then you will not buy the shares. Whether or not you continue the deal, the stock exchange keeps $200 as the risk premium and to make it a fair deal. What is this type of deal?
  1. A futures contract.
  2. A call option.
  3. An over-the-counter contract.
  4. A forward contract.
Explanation
This type of deal is known as a “call option.” A call option is a contract that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

Key Takeaway: A call option gives you the right to buy an asset. You profit on a call when the underlying asset increases in price.
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