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:

Discounts

A reduction applied to the normal selling price of goods or services, offered to stimulate sales or attract customers.

Marketing Pricing Strategy

The approach a business takes in setting the price for its products or services to achieve specific marketing objectives.

Predatory Pricing

A strategy where a company sets extremely low prices with the intent to eliminate competition or deter new entrants to the market.

Experience-Curve Pricing

A pricing strategy that assumes costs will decrease over time as experience in production increases, leading to lower prices for consumers.