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:

Return on Assets

A financial ratio indicating how profitable a company is relative to its total assets.

Weighted Average Cost of Capital

An average representing the expected return on all of a company's securities, weighted according to the proportion each contributes to the total capital structure.

Systematic Risk

The risk inherent to the entire market or market segment, also known as market risk.

Levered Firms

Companies that use debt in their capital structure alongside equity.