Question

A(n) ____________ conveys the right, but not the obligation, to make an investment. The term is often used to describe the type of portfolio of innovations that a firm might take a stake in to gain access to potential disruptions.

a. choice
b. preference
c. option
d. privilege

Answer 1

An option conveys the right to invest without obligation. Small companies might issue stock to avoid mandatory payments. Venture capitalists closely monitor companies and have better information due to substantial ownership.

Step-by-step explanation:

The instrument that conveys the right, but not the obligation, to make an investment is known as an option. This term is frequently used to describe a type of portfolio of innovations that a firm might invest in to secure access to potential disruptions. When a small company is focusing on growth and might not have profits to distribute, issuing stock is advantageous since it does not require regular payments like interest on bonds or loans would; however, the company may choose to pay dividends. On the other hand, venture capitalists are private investors who closely monitor a company's management and strategy, often owning a substantial share of the company, which provides them with better information than a typical shareholder.

Answer 2

An 'option' enables investors to have a stake in an asset's future value without the obligation to invest, which is crucial for companies and venture capitalists managing risk and potential growth. Option 'c' is the correct answer to the student's question.

Step-by-step explanation:

A financial instrument that conveys the right, but not the obligation, to make an investment and is often used to describe the type of portfolio of innovations that a firm might take a stake in to gain access to potential disruptions is known as an option. This instrument allows investors, including firms and venture capitalists, to speculate on the future value of an asset. Specifically, option 'c' from the given choices is the correct answer to the student's question.

A small company that wishes to reinvest in itself for future growth has the decision of issuing bonds, which come with obligatory interest payments, or issuing stock, which would not obligate the company to make regular payments though it may choose to pay dividends.

Venture capitalists, as private investors, may choose to invest in such companies via stock options since they offer the advantages of greater control and information asymmetry. Option contracts are an essential tool for investors like venture capitalists seeking to manage the risk and potential upside of their investments.