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

Quizplus · Accepted Answer

Options provide the holder with the right but not the obligation to execute the transaction at a predetermined price and time. Therefore, if the potential transaction does not take place, the holder can simply choose to not exercise the option and avoid the cost of the hedge. This flexibility makes options a suitable choice for hedging potential risks.

A Firm Wants to Hedge a Potential Transaction but Is