Asked by Camille James on Jun 24, 2024
Verified
An option contract can be used to either hedge risk or speculate in the market.
Option Contract
A contract which grants the holder the right to buy or sell an underlying asset at a predetermined price within a specified time frame.
Hedge Risk
A financial strategy used to limit or offset the probability of loss from fluctuations in the prices of currencies, commodities, or securities.
Speculate
The act of investing or trading in financial assets with high risk in anticipation of significant returns.
- Understand the role of financial derivatives in mitigating market risks.
- Evaluate the effects of applying derivatives for speculative activities versus their application for hedging purposes.
Verified Answer
EA
Emmanuel AniemekeJun 29, 2024
Final Answer :
True
Explanation :
Option contracts offer investors the flexibility to hedge against potential losses in their investment portfolio or to speculate on the direction of market prices with the potential for high returns.
Learning Objectives
- Understand the role of financial derivatives in mitigating market risks.
- Evaluate the effects of applying derivatives for speculative activities versus their application for hedging purposes.