Which of the following is Correct?

Question

Options

• AThe insurance company transfers to the seller of a call option the opportunity for capital loss-if the
• BThe insurance company transfers to the buyer of a call option the opportunity for capital gain-if
• CThe insurance company transfers to the seller of a call option the opportunity for capital loss-if the
• DThe insurance company transfers to the buyer of a floor option the opportunity for option gain-if

• A
  2% (1)
• B
  84% (48)
• C
  9% (5)
• D
  5% (3)

Explanation

Option B is correct because when an insurance company sells a call option, it transfers to the buyer the right - and therefore the opportunity - to profit from rising asset prices. If the underlying asset's value exceeds the strike price, the call option buyer captures that capital gain, which the insurance company has effectively given up.

Why the distractors fail:

• A and C incorrectly name the seller as the recipient of the opportunity. The call option seller (the insurer) collects the premium but gives away the upside - the buyer is who gains. "Capital loss" language also mischaracterizes the buyer's position.
• D introduces a floor option, which is an interest rate instrument that protects against rates falling below a minimum level - it's the wrong instrument type, and "option gain" is not standard terminology here.

Memory tip: Think of it this way - a call option buyer calls up their gains when prices rise. The insurance company (seller) hands that upside over, keeping only the premium. Seller gives, buyer receives - always.

No community discussion yet for this question.