Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation?
A) Purchased a call option
B) Purchased a put option
C) Purchased and simultaneously sold the same call option
D) Sold a call option
E) Sold a put option

Question

Quizplus · Accepted Answer

Sue purchased a put option which grants her the right to sell the underlying asset at a fixed price (strike price) that is higher than the market price in the future. As the value of the underlying asset declines, the put option becomes more valuable to Sue since she can still sell the asset at the higher strike price. Therefore, as the value of the asset declines, the value of Sue's put option increases.

Sue Has a Contract That Grants Her a Right That