Question

Which if the following is FALSE regarding options and futures?

Group of answer choices

Derivatives such as options and futures are risky securities and therefore rarely used for hedging purposes since hedging is designed to reduce risk.

A long call option gives the holder the right to buy an asset at the strike price whereas a long futures position obligates the holder to buy the asset at the futures price.

A short call option exposes the seller to unlimited potential loss.

Buying a put option is like buying insurance on an asset. If the asset’s price declines, the put holder can sell the asset at the strike price to defray any losses in the asset’s value.

In a short put option, the seller’s maximum loss is the strike price.

Answer 1

The incorrect statement is

Derivatives such as options and futures are risky securities and therefore rarely used for hedging purposes since hedging is designed to reduce risk.

Hedging is for reducing risk and derivatives such as options and futures are very effective hedging techniques.

Long call option gives the right and obligation in futures contract

Unlimited loss in short call, maximum loss = Strike price in short put

Put is like insurance

Hence, all other statements are correct