Question

In: Finance

Which of the following is correct in the cases of the Option contracts? Select one: a....

Which of the following is correct in the cases of the Option contracts? Select one:

a. None of these

b. Option buyer’s gains can be limited

c. Option writer’s losses can be unlimited

d. Option writer’s gains can be unlimited

e. Option buyer’s losses can be unlimited

Solutions

Expert Solution

Answer is: c. Option writer’s losses can be unlimited.

In case of call option, the buyer of the option has the right but not an obligation to buy the underlying from the writer of the option at strike price of the option at expiration date. option is settled in cash if underlying price at expiration is higher than strike price. then writer of the option will pay to buyer the difference of underlying price at expiration and strike price. underlying price at expiration can be any number greater than strike price. that's why Option writer’s losses can be unlimited in this case.

jeff jeffy answered 2 years ago
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