Certified Management Accountant 2026 – 400 Free Practice Questions to Pass the Exam

A put option is a financial contract that gives the holder the right, but not the obligation, to sell a specific asset at a predetermined price, known as the exercise price, within a specified time frame. This means that if the market price of the asset falls below the exercise price, the holder can sell the asset at the higher exercise price, thus limiting potential losses or even realizing a profit.

The significance of a put option is primarily in its ability to act as a form of insurance against declines in the asset's value. When the market conditions are unfavorable, the holder can exercise the put option to mitigate losses. This characteristic makes put options a valuable tool for investors looking to hedge their positions in the market.

The other possible answers do not accurately capture the essence of a put option: one implies purchasing rights, another refers to an obligation rather than a right, and the last one suggests a promise to buy at market value, which does not apply to the fundamental concept of a put option. Thus, the correct understanding of a put option centers around the right to sell an asset at a specified price, making option C the correct choice.