What Is the Reason for an Investor to Pay for a Zero

question 36

Multiple Choice

What is the reason for an investor to pay for a zero intrinsic value option?

• A) there is always a chance that the spot rate will move before expiration putting the option in the money
• B) there is always a chance that the strike price for options with different maturities will increase
• C) investors are typically not investing in zero intrinsic value options
• D) the premiums for zero intrinsic value options are very small

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Definitions:

Maturity Risk

The danger that an investment’s value will change due to a change in the absolute level of interest rates, typically affecting fixed-income securities as they approach maturity.

Marketable Securities Portfolio

A collection of liquid securities that a company holds, which can easily be converted into cash.

Commercial Paper

An unsecured, short-term debt instrument issued by corporations.

Treasury Bills

Short-term government securities issued at a discount from their face value, maturing in a year or less.