A call option puts a limit on cash outflow and:
A)reduces risk.
B)increases risk.
C)eliminates risk.
D)increases cash inflow.

Question

Quizplus · Accepted Answer

A call option is a type of financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset (such as a stock or commodity) at a predetermined price (strike price) within a specified period. By buying a call option, the investor limits their cash outflow to the premium paid for the option, and they can potentially benefit from price increases in the underlying asset. This reduces the risk of losing a significant amount of money in case the asset price falls. Therefore, the correct answer is A, as a call option reduces risk.

A Call Option Puts a Limit on Cash Outflow And