A riskless hedge can best be defined as Answer A situation in which aggregate ri

Question

A riskless hedge can best be defined as
Answer
A situation in which aggregate risk can be reduced by derivatives transactions between two parties.
A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position.
Standardized contracts that are traded on exchanges and are "marked to market" daily, but where physical delivery of the underlying asset is virtually never taken.
Two parties agree to exchange obligations to make specified payment streams.
Simultaneously buying and selling a call option with the same exercise price.

Explanation / Answer

Answer: A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position. Buy buying a stock, you own the stock. But at the same time, you sell the call option, you have the right to sell the stock when the option expired. By doing this, you lock your own profit and riskless for stock price fluctuation.

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