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

Question

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

Quizplus · Accepted Answer

Using options to reduce risk is called hedging. Hedging involves taking a position in a financial instrument that is opposite to an existing position in order to reduce or eliminate the risk associated with the original position. In the case of options, this might involve buying options that will generate a profit if the value of an underlying asset falls, to offset potential losses on an existing long position in that same asset.

Using Options to Reduce Risk Is Called