Why Might a Financial Manager Prefer Using Option Contracts Instead

question 76

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:

Business Relationships

Connections between businesses that involve collaborative arrangements, transactions, or some form of mutual engagement for mutual benefit.

Reported EPS

Earnings per share as officially announced by a company, representing the portion of a company’s profit allocated to each outstanding share of common stock.

Analysts' Expectations

Analysts' expectations are forecasts or projections made by financial analysts about a company's future earnings, revenue, or performance.

Conflicts of Interest

Situations where an individual's or entity's vested interests may potentially interfere with their ability to make impartial decisions, often leading to ethical dilemmas in various professions and fields.