An agreement giving the buyer the right to receive, sell or effect a cash settlement based on the actual performance of an underlying interest is called:

Question

Options

• AActuator
• BGain
• CHedging
• DOption

• A
  5% (1)
• B
  5% (1)
• C
  15% (3)
• D
  75% (15)

Explanation

An option is precisely defined as a contract granting the holder the right (but not the obligation) to receive, sell, or settle in cash based on the actual performance of an underlying asset - matching the question's definition exactly.

Why the distractors are wrong:

• Actuator (A) is a mechanical/electrical component that converts signals into physical motion - entirely unrelated to finance.
• Gain (B) is simply a financial profit or increase in value, not a type of agreement or instrument.
• Hedging (C) is a strategy of reducing risk by taking offsetting positions - it's a technique, not a specific contractual instrument.

Memory tip: Think of an option as giving you a choice - the word "option" itself means choice or right, and that's exactly what the contract provides: the right (not requirement) to act based on underlying performance.

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