Why Might a Financial Manager Prefer Using Option Contracts Instead

question 64

Multiple Choice

Why might a financial manager prefer using option contracts instead of futures or forward contracts to hedge?

• A) Futures and forwards require a premium be paid up front,while options do not.
• B) Options provide protection against adverse price movements but allow the user to profit if the price of the underlying asset moves favorably.
• C) Options create an obligation to perform,while futures and forwards do not.
• D) Futures and forwards all have greater default risk than options.

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Definitions:

Preferred Dividends

Preferred dividends are payments made to holders of preferred shares in a company, typically at a fixed rate, and have priority over common stock dividends in terms of distribution.

Earnings per Share

A company's profit divided by its number of common outstanding shares.

Weighted-average Shares

A calculation used in financial reporting that adjusts the number of outstanding shares for their time outstanding during the calculation period.

Retained Earnings

Earnings accumulated by a company thus far, after subtracting any dividends or distributions made to shareholders.