Q1. When comparing option hedging (hedging with options) to futures hedging (hed
ID: 2754721 • Letter: Q
Question
Q1. When comparing option hedging (hedging with options) to futures hedging (hedging with futures), which statement is most true:
A) Option hedging allows for smaller variability in the end value than futures hedging.
B) Futures hedging protects against downside risk but allows for upside potential.
C) Futures hedging is more expensive than option hedging because the latter is settled in cash.
D) Option hedging protects against downside risk but is typically more expensive than futures hedging.
Q2.
The following put-call parity holds for American options.
c + K e^(-rT) = p + S0
A) True
B) False
A) Option hedging allows for smaller variability in the end value than futures hedging.
B) Futures hedging protects against downside risk but allows for upside potential.
C) Futures hedging is more expensive than option hedging because the latter is settled in cash.
D) Option hedging protects against downside risk but is typically more expensive than futures hedging.
Q2.
The following put-call parity holds for American options.
c + K e^(-rT) = p + S0
A) True
B) False
Explanation / Answer
Q1)
b). In futures the call is taken based on position we are holding either call or short. So there will be protection about downside risk but there is unlimited upside
Q2) False. As in american option the option can be exercised before maturity the put hold parity does not hold true for amwerican options
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