Which of the Following Is an Advantage of Hedging with Options

question 108

Multiple Choice

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) 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.
• C) 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.
• D) Options allow investors to purchase a forward contract at a later date.

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Definitions:

Gross Domestic Product

The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

Cumulative Value

The total value generated over time by a series of financial transactions or investments.

Aggregate Income

All earnings of resource suppliers in an economy during a given period, usually a year.

Price Level

A measure of the average prices of goods and services in the economy at a given time, often used to assess inflation rates.