Question

Explain how forwards or futures can be used to manage risk. Provide an example of a hedge that uses a short futures position.   Why might you chose to use a put option instead of a short futures position?

Answer 1

Forward or future fixes or sets the price of something. So even if the price decreases or increases the future holder is not affected.

For example: If one has some receivables in a different currency, he would lose when thr currency depreciates. Hence, to minimize risk he can short future or forward. So when currency depreciates he would lose on his receivables but the loss would be offset by the gain from short futures position.

Put option grants more leverage. So if one has less margin amount in his account he wont be able to short futures but he can buy put options. Secondly, he wants the right but not the obligation. Put option grants the right without any obligation however future and forward imposes some obligation as well.