Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

What is an Options Contract?

1. The obligation to sell a set amount of something

2. The right to buy or sell without obligation

3. A mandatory contract with fixed penalties

4. A trade agreement requiring physical delivery

The correct answer is: The right to buy or sell without obligation

An options contract is indeed defined as the right to buy or sell an underlying asset at a predetermined price within a specified time frame, without any obligation to do so. This means that the holder of the option can choose whether or not to execute the contract based on market conditions, thus having the flexibility to act in their best interest. For instance, if someone holds a call option, they have the right to purchase the underlying asset at a set price before the option expires. If the market price is favorable, they can exercise the option; if not, they can simply let it expire without any financial penalty. This aspect of 'right without obligation' is what distinguishes options from other types of contracts, where obligations can be compulsory. Understanding this flexibility and lack of obligation is crucial to grasping how options are utilized in trading and investment strategies. This knowledge not only assists individuals in making informed decisions but also helps in identifying the potential risks and rewards associated with trading options.