Chartered Financial Analyst Level 1
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If a European investor anticipates a decline in the US equity market over the next three months, which transaction would most likely enable the investor to profit from this view?
If a European investor anticipates a decline in the US equity market over the next three months, which transaction would most likely enable the investor to profit from this view?
Explanation:
Explanation:
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Option A (Correct): A put option allows the holder to sell the underlying asset at a predetermined strike price. If the US equity market declines, the investor can profit by purchasing the asset at the lower market price and selling it at the higher strike price.
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Option B (Incorrect): A call option allows the holder to buy the underlying asset at a predetermined strike price. This would not be advantageous if the market declines, as the strike price would likely be higher than the market price.
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Option C (Incorrect): A currency swap involves exchanging payments in different currencies and does not provide a direct mechanism to profit from a decline in the equity market.