Consider hedging an exposure with (i)a futures contract,or (ii)an option with a strike price close to the futures price.The hedge with the futures contract
A)Has more cashflow uncertainty.
B)Has no upfront cost.
C)Has non-negative payoffs.
D)Has more cashflows.

Question

Quizplus · Accepted Answer

Hedging with a futures contract has no upfront cost, but it involves more cashflow uncertainty compared to hedging with an option. Therefore, option hedging with a strike price close to the futures price may not be as effective as futures hedging in terms of non-negative payoffs, but it provides more certainty in cashflow.

Consider Hedging an Exposure with (I)a Futures Contract,or (Ii)an Option