Question

1. Identify all of the strategies below that could be used to successfully hedge an anticipated...

1. Identify all of the strategies below that could be used to successfully hedge an anticipated future purchase.

A. Long call

B. Long call and short put

C. Long put and short call

D. Long put

More than one answer

2. Identify all of the strategies below that could be used to successfully hedge an anticipated future sale.

A. Long put and short call

B. Long call

C. Long call and short put

D. Long put

Also more than one answer

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Homework Answers

Answer #1

1. We are anticipating a purchase of a future contract. So, we are exposed to the risk in increase in price of futures.

To hedge against this risk we can go long a call option and/or short a put.

So, the correct answer is options A and B

Options C and D are incorrect because Long put protects against the downside risk.

2. We are anticipating a sale of a futures cotract. So, we are exposed to the downside risk

To hedge against this risk we can go long a put option and/or call a put.

The correct answer is options A and D

A. Long put and short call and  Long put

Options B and C are incorrect because long call doesn't provide downside protection

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