Question

1.One advantage of hedging with options is that there is limited down-side risk, but favorable price changes still benefit the hedger. (True or False)

2.What happens to the intrinsic value of a call option that is "in the money" if the price of the underlying futures contract increases.

The intrinsic value increases.

The intrinsic value decreases.

The intrinsic value stays at zero.

Answer 1

1.Solution:-True

Explaination:-Given statement is absolutly true.One advantage of hedging with options is that there is limited down-side risk, but favorable price changes still benefit the hedger. Price risk can be considered one of most important risks most foreign trade companies face. From this aspect use of modern futures markets can be considered a basic precondition for the survival of most businesses. For the purpose of insurance hedging has been in use for more than a century, but still its.

2.Solution:-The intrinsic value increases.

Explaination:-The intrinsic value of a call option that is "in the money" is increases if the price of the underlying futures contract increases. The most influential factor on an option premium is the current market price of the underlying asset. In general, as the price of the underlying increases, call prices increase and put prices decrease. Conversely, as the price of the underlyingdecreases, call prices decrease and put prices increase.