A few weeks ago, you realised that you were exposed to movements in the price of oil. At that time, you hedged this exposure by
A few weeks ago, you realised that you were exposed to movements in the price of oil. At that time, you hedged this exposure by entering a long call option written on oil.
The call option had a strike price of $90 per barrel. At the time of the option expiry, the spot price of oil is $85 per barrel.
Hedging with options gives you a degree of flexibility. What is the rational decision to make at expiry?
a: Exercise your right to buy oil for $90
b: Impossible to say without knowing the option premium paid for the long call
c: Let the call option lapse
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Authors: Thomas Edmonds, Christopher Edmonds
9th edition
9781259296802, 9781259296758, 78025907, 1259296806, 9781259296765, 978-0078025907
