ACCA Financial Management (F9) Certification Practice Exam

What does a put option allow an investor to do?

1. Buy shares of stock at a future date

2. Sell shares of stock at a specified time in the future

3. Invest in commodities at a predetermined rate

4. Trade bonds at market value

The correct answer is: Sell shares of stock at a specified time in the future

A put option is a financial contract that grants the holder the right, but not the obligation, to sell a specified quantity of an underlying asset, usually shares of stock, at a predetermined price (known as the strike price) within a specified time period. This feature provides investors with a way to hedge against a decline in the value of their assets. When investors anticipate that the price of a stock is going to drop, purchasing a put option can be beneficial. If the stock price does fall below the strike price, the investor can exercise the option and sell the shares at the higher strike price, minimizing losses. Conversely, if the stock price remains stable or rises, the investor is not obligated to execute the option and can choose to let it expire. The other choices describe different financial instruments or actions. Buying shares of stock at a future date pertains to call options, investing in commodities relates to commodity options or futures contracts, and trading bonds at market value does not align with the functionality of options. Therefore, the correct understanding of a put option is clearly represented in the choice highlighting the ability to sell shares of stock at a specified time in the future.