Hedging by buying an option
A)limits gains.
B)limits losses.
C)limits gains and losses.
D)has no limit on option premiums.

Question

Quizplus · Accepted Answer

Hedging by buying an option limits losses. This is because the buyer of an option has the right, but not the obligation, to exercise the option. If the underlying asset price moves against their position, they can simply let the option expire and their loss is limited to the premium paid for the option. If the price moves in their favor, they can exercise the option and benefit from the price movement. However, their gains are limited to the difference between the strike price and the market price, minus the premium paid for the option.

Hedging by Buying an Option