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

Which of the following best describes stock options?

1. Investment bonds

2. Long-term savings accounts

3. Rights to buy or sell shares at predetermined prices

4. Interest-bearing loans

The correct answer is: Rights to buy or sell shares at predetermined prices

Stock options refer to contracts that give an individual the right, but not the obligation, to buy or sell shares of a specific stock at a predetermined price within a specified time frame. This financial instrument is primarily used by employees as part of compensation packages or by investors as strategic tools for trading. The defining characteristic of stock options is their association with predetermined prices, known as the strike price, which can significantly influence investment decisions and risk management strategies. They are not investment bonds, long-term savings accounts, or interest-bearing loans, as these represent entirely different financial instruments or accounts with distinct terms and purposes. Stock options can play a vital role in hedging against market volatility and providing additional income potential, which is why understanding them is essential for anyone involved in financial markets or corporate finance.