A Call Option Can Be Used to Hedge the Risk

question 107

True/False

A call option can be used to hedge the risk of a price rise in the underlying asset.It establishes a price cap for acquiring the asset equal to the exercise price.

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Definitions:

Variable Cost

Costs that vary in direct proportion to changes in levels of production or business activity, such as materials and labor.

Fixed Cost

A cost that does not change with the volume of sales.

Fixed Costs

Expenses that do not change in proportion to the activity of a business, such as rent, salaries, and loan payments.

Variable Costs

Costs that vary directly with the level of production or sales, such as materials and labor.