Compare the differences between hedging using forward contracts and hedging using options.

Question

Quizplus · Accepted Answer

The Answer is Forward contracts help hedger to mitigate risk of adverse price movement by fixing the purchase price or the sale price for the underlying asset. On the contrary, options protect hedger from the downside risk while still provides an opportunity to gain from favourable price movements. Besides, it costs nothing to enter into a forward contract, whereas option requires an up-front fee.

Compare the Differences Between Hedging Using Forward Contracts and Hedging