The instrument that gives the holder the right to sell an underlying asset at a specified price by a certain date is called a:

The instrument that gives the holder the right to sell an underlying asset at a specified price by a certain date is called a:

• A. Call option
• B. Put option
• C. Futures contract
• D. Forward contract

Answer: (B)

Put options grant the holder the right to sell the underlying asset at a predetermined price (the strike price) on or before a specified expiration date. That right to sell, by a set date and at a set price, is exactly what the description describes. A call option does the opposite, giving the right to buy, not to sell. Futures and forward contracts are not optional rights; they are binding agreements that obligate the parties to transact at a future date at a predetermined price. So the instrument described is a put option.

Put options grant the holder the right to sell the underlying asset at a predetermined price (the strike price) on or before a specified expiration date. That right to sell, by a set date and at a set price, is exactly what the description describes. A call option does the opposite, giving the right to buy, not to sell. Futures and forward contracts are not optional rights; they are binding agreements that obligate the parties to transact at a future date at a predetermined price. So the instrument described is a put option.