Question

Ben, a privately held US metals broker, has acquired an option to purchase 1 million kg of a metal at a certain price. If the market price rises above the option price, Ben will exercise the option. What type of option is this?

A. Call option
B. Put option
C. Long option
D. Short option

Answer 1

The option in question is a call option, which entitles the holder to purchase an asset at a predefined price if the market price rises above that level.

Step-by-step explanation:

The option described in the question is known as a call option. A call option gives the holder of the option the right, but not the obligation, to purchase an asset at a specified strike price within a defined period of time. In this case, if the market price of the metal rises above the option's strike price,

Ben, the holder of the option, can exercise the option and buy the metal at the lower strike price, and potentially sell it at the higher market price, thereby profiting from the difference.

A put option, on the other hand, gives the holder the right to sell an asset at a specified strike price, and would be beneficial if the asset's price were to fall below that strike price.

The terms long option and short option refer to the position of an options trader. A trader is 'long' if they have bought an option, which means they hold a call or a put option, and 'short' if they have sold an option.

Answer 2

Ben, a privately held US metals broker, has acquired an option to purchase 1 million kg of a metal at a certain price. If the market price rises above the option price, Ben will exercise the option. This is a A. Call option

Explanation:

In this scenario, Ben holds a call option. A call option provides the buyer, in this case, Ben, with the right (but not the obligation) to purchase the underlying asset—in this instance, 1 million kg of a metal—at a predetermined price (the option price). If the market price of the metal rises above the option price, Ben can choose to exercise the option, allowing him to buy the metal at the agreed-upon lower price. This strategy is advantageous when the buyer anticipates a potential increase in the market price, allowing them to secure the asset at a more favorable rate.

The other options can be ruled out based on the nature of the agreement. A put option would grant the right to sell an asset at a specified price, not buy it. Long and short options are terms often associated with stock ownership or investment positions, but they don't specifically refer to the nature of an option contract. Therefore, in the context provided, the correct classification is a call option, reflecting Ben's ability to call or buy the metal at the agreed-upon price.

Understanding the distinctions between these option types is crucial for investors and traders in navigating the complexities of financial markets and effectively managing their risk and exposure to price movements.