What is a 'call' option?

A 'call' option is a financial contract that gives the holder the right, but not the obligation, to buy an underlying asset at a specified price (known as the strike price) within a specified period. This is a fundamental concept in options trading, where traders use call options to speculate on price increases of the underlying asset or to hedge potential losses in other investments.

When investors purchase a call option, they are anticipating that the price of the underlying asset will rise above the strike price before the expiration date, allowing them to buy the asset at a lower price and potentially sell it at the higher market price for a profit. This transformation of potential into actual gains is a key aspect of options trading and leveraging market movements.

The other choices involve different types of financial instruments or concepts. For instance, an option to sell something at a specified price describes a 'put' option, while an agreement to exchange cash on a future date refers to a forward contract. Lastly, mentioning a type of bond does not relate to the nature of options. Additionally, understanding call options is crucial for participants in debt and money markets as they can impact strategies involving stocks, commodities, and bonds.