Cathy Limited buys an option that entitles it to purchase 3000 shares in Colin Limited at $6 per share at any time in the next 6 months.The derivative financial instrument in this transaction is the:
A)shares in Cathy Limited.
B)shares in Colin Limited.
C)option priced at $6 per share.
D)market price of the shares in Colin Limited after 6 months have elapsed.

Question

Quizplus · Accepted Answer

The derivative financial instrument in this transaction is the option priced at $6 per share. An option is a type of derivative financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and within a set time period. In this case, the option purchased by Cathy Limited gives them the right to purchase shares in Colin Limited at a predetermined price of $6 per share within the next 6 months.

Cathy Limited Buys an Option That Entitles It to Purchase