If a Long Counterparty Has the Right but Not the Obligation

question 9

Multiple Choice

If a long counterparty has the right but not the obligation to buy the underlying asset at a future date at a strike price,the contract is called a(n) :

• A)forward.
• B)option.
• C)future.
• D)agreement for purchase.

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Definitions:

Substitution Effect

The economic principle that as the price of a good increases, consumers will replace it with cheaper alternatives, whereas if the price decreases, the good will become more preferable.

Output Effect

The effect that changes in the price level have on production due to the incentive for producers to increase supply when the price is higher.

Profit-maximizing

The method a company uses to identify the pricing and production volume that maximizes profit.

Marginal Product

The additional output that is produced by using one more unit of a factor of production, all else held constant.