Which one of the following best defines the primary purpose of a protective put?
A)ensure a maximum purchase price in the future
B)offset an equivalent call option
C)limit the downside risk of asset ownership
D)lock in a risk-free rate of return on a financial asset
E)increase the upside potential return on an investment

Question

Quizplus · Accepted Answer

The primary purpose of a protective put is to limit the downside risk of asset ownership. It involves buying a put option on a stock or other asset, which provides the holder with the right to sell the asset at a specified price (strike price) within a specified period of time (expiration date). If the price of the asset falls below the strike price, the holder can exercise the put option and sell the asset at the higher strike price. This limits their potential losses and protects them from downside risk.

Which One of the Following Best Defines the Primary Purpose