Using options to reduce risk is called:
A)speculation.
B)a naked position.
C)hedging.
D)a covered position.

Question

Using options to reduce risk is called:
A)speculation.
B)a naked position.
C)hedging.
D)a covered position.

Quizplus · Accepted Answer

Using options to reduce risk is called hedging. Hedging involves taking an offsetting position in a financial instrument to reduce the risk of a potentially adverse price movement. This is often done through options, where an investor can purchase a put option to protect against a downward price movement or purchase a call option to protect against an upward price movement. Speculation involves taking a position in a financial instrument in the hopes of making a profit, while a naked position refers to holding an uncovered option where the investor is exposed to unlimited loss. A covered position involves taking a position in an underlying asset while also holding an offsetting position in options to reduce risk.

Using Options to Reduce Risk Is Called