Portfolio Management Practice Exam

A call option provides the holder with the right, but not the obligation, to purchase an underlying asset at a predetermined price, known as the strike price, before or at the expiration date of the option. This means that if the market price of the asset exceeds the strike price, the holder can exercise the option to buy the asset at the lower strike price, potentially allowing for significant profit. This characteristic makes call options valuable for investors who anticipate that the value of the underlying asset will increase in the future.

The other choices do not accurately describe the primary function of a call option. The option to sell an asset at a specified price refers to a put option and does not apply here. Investing in mutual funds is unrelated to the function of call options since it involves pooled investments rather than directly trading specific underlying assets. The choice "None of the above" is also incorrect because it does not acknowledge the fundamental role of call options in providing the right to buy an asset at a set price.