A firm wants to hedge a potential transaction but is also concerned about a possibility that it may not take place. In this case, it is better to hedge potential risks using

Question

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Options provide the flexibility to hedge against potential risks while also allowing the firm to choose whether or not to exercise the option depending on whether the transaction takes place. Forwards and futures require the firm to enter into a binding agreement to buy or sell at a specified price, regardless of whether the transaction ultimately occurs or not.

A Firm Wants to Hedge a Potential Transaction but Is