ACCA Financial Management (F9) Certification Practice Exam

What is a call option in financial terms?

1. The option to sell shares of stock at a future date

2. The option to buy shares of stock at a specified time in the future

3. A contract giving the right to purchase bonds

4. The option to buy financial assets at current market rates

The correct answer is: The option to buy shares of stock at a specified time in the future

A call option is a fundamental concept in financial derivatives that provides the holder the right, but not the obligation, to purchase shares of stock at a predetermined price, known as the strike price, within a specified timeframe. This option allows investors to benefit from potential increases in the stock's price. If the market value of the stock exceeds the strike price before the option's expiration, the holder can exercise the option to buy the stock at the lower strike price, thus profiting from the price difference. The specificity of the term "specified time in the future" is crucial, as it highlights the time-bound nature of options trading, where the holder must make a decision to exercise the option or let it expire within that timeframe. The other choices do not accurately define a call option: one refers to a put option (the right to sell), another describes a contract related to bonds (which is separate from stock options), and the last mentions buying at current market rates rather than a fixed strike price, which misrepresents the nature of how call options operate.