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:

Variable Production Costs

Expenses that fluctuate with the level of output or production, including costs like raw materials and direct labor.

Fixed Production Costs

Costs that do not change with the level of production, such as rent for factory space or salaries for permanent staff.

Variable Manufacturing Costs

Costs that change in proportion to the levels of production or sales volume, such as raw materials and direct labor.

Sales

Sales involve the exchange of goods or services for payment, essentially representing the revenue generated from these transactions.