Alpha Company purchases a call option to hedge an investment of 20,000 shares of Beta Company stock. The option agreement provides that if the prices of a share of Beta Company stock is greater than $30 on October 25, Alpha receives the difference (multiplied by 20,000 shares). Alternatively, if the price of the stock is less than $30, the option is worthless and will be allowed to expire. Which of the following statements regarding this call option is correct?
A) The call option effectively hedges the investment in the shares of Beta stock.
B) The call option is an option to sell Beta Company stock at a fixed price.
C) The call option represents a speculative option rather than a hedge.
D) Alpha could have purchased a put option or a call option to effectively hedge the investment in the shares of Beta stock.

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The Answer of Alpha Company purchases a call option to hedge an investment of 20,000 shares of Beta Company stock. The option agreement provides that if the prices of a share of Beta Company stock is greater than $30 on October 25, Alpha receives the difference (multiplied by 20,000 shares). Alternatively, if the price of the stock is less than $30, the option is worthless and will be allowed to expire. Which of the following statements regarding this call option is correct?
A) The call option effectively hedges the investment in the shares of Beta stock.
B) The call option is an option to sell Beta Company stock at a fixed price.
C) The call option represents a speculative option rather than a hedge.
D) Alpha could have purchased a put option or a call option to effectively hedge the investment in the shares of Beta stock.

Alpha Company Purchases a Call Option to Hedge an Investment