Question

Which of the following is an advantage of hedging with options instead of forward​ contracts? A....

Which of the following is an advantage of hedging with options instead of forward​ contracts?
A.
Options prices tend to be lower than forward prices.
B.
Options allow investors to purchase a forward contract at a later date.
C.
If the price moves in the opposite direction to the one hedged​ against, the hedger can decline to exercise the option and limit the loss to what was paid for the option.
D.
If the price moves in the direction of the one hedged​ against, the hedger can decline to exercise the option and limit the loss to what was paid for the option.

Homework Answers

Answer #1

Ans C. If the price moves in the opposite direction to the one hedged​ against, the hedger can decline to exercise the option and limit the loss to what was paid for the option.

A call option gives the buyer the right to buy an asset at a fixed price at a fixed date. A forward contract is an obligation to buy or sell an asset. Thus forwards are obligatory. Forwards are also high customizable allowing for a customized date and price, the same is not possible in options.

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