Dickson Corporation Limited buys an option that entitles it to purchase 4000 shares in Moody Limited at $8 per share at any time in the next 6 months. The derivative financial instrument in this transaction is the:
A) option priced at $8.
B) shares in Moody Limited.
C) shares in Dickson Corporation Limited.
D) price of the shares in Moody Limited after 6 months have elapsed.

Question

Quizplus · Accepted Answer

The derivative financial instrument in this transaction is the option, which gives Dickson Corporation Limited the right to purchase shares in Moody Limited at a fixed price within a certain timeframe (in this case, 6 months). The option itself is the derivative financial instrument, not the shares in Moody Limited or Dickson Corporation Limited. The option is priced at $8, which is the strike price at which Dickson Corporation Limited can purchase the shares.

Dickson Corporation Limited Buys an Option That Entitles It to Purchase