Question

Which of the following statement is true?

For any type of derivatives, the payoffs will never be negative

For any type of derivatives, the profit will never be negative

There is no derivative that offers non-negative payoffs

There is no derivative that offers non-negative profit

All of the statements above are wrong

Answer 1

1. In case of a GAP call option where the trigger price is less than the strike price, negative payoffs are possible.

2. We know that the payoff can be positive or negative at expiration so there is no guarantee of a positive payoff in any state of the world.

3. There are derivatives that offer non-negative payoffs.

4. There are derivatives that offer non-negative profit.

Hence, the correct option is (E).

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