ACCA Financial Management (F9) Certification Practice Exam

Which of the following is a characteristic of Options?

1. They are obligations to buy or sell an asset

2. They provide the right but not the obligation to buy or sell an asset

3. They are always long-term financial instruments

4. They are regulated by government agencies

The correct answer is: They provide the right but not the obligation to buy or sell an asset

The correct answer highlights a fundamental characteristic of options in financial markets. Options are derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, known as the strike price, before or at a specified expiration date. This unique feature distinguishes options from traditional contracts, as the holder has the flexibility to decide whether to exercise the option based on market conditions. This flexibility allows investors to hedge against potential losses, speculate on price movements, or enhance investment strategies without the necessity of fulfilling a requirement to buy or sell the underlying asset. This right without obligation creates opportunities for strategic financial planning and risk management. Regarding the other options, while some may seem plausible at first glance, they do not accurately capture the defining nature of options. For instance, they are not obligations; rather, they grant rights. Additionally, options can be both short-term and long-term instruments, so the assertion that they are always long-term is incorrect. Lastly, while options are regulated financial instruments, the statement does not encapsulate the essence of what makes options unique. Therefore, the distinguishing feature of providing a right without obligation clearly sets option contracts apart.