Question

Suppose that you are mining company that produces mostly copper. You want to hedge your position in copper and you are thinking of using the options market to hedge. Which are the options you could trade to hedge your natural position?(Choose all that apply)

Group of answer choices:

A long put

A short put

A long call

A short call

A long position in the forwards market

A short position in the forwards market

Answer 1

We are having Mining company. So we can extract Copper. We have chance of loosing copper Price.

To hedge this, we can have

1 . Long Put

2. SHort Call

3. Short position in forward market.

Put Option:
Holder of Put option will have right to sell underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of Put option.He will exercise the right, when expected spot price < Strike Price. Then writer of option has to buy at the strike Price.

Call Option:
Holder of call option will have right to buy underlying asset at the agreed price ( Strike Price). As he is receiving right, he needs to pay premium to writer of call option.He will exercise the right, when expected spot price > Strike Price. Then writer of option has to sell at the strike Price.

Forward Market:

We can enter ento Forward Sale Contract ( Short position). SO that we can agrre to sell copper in future at agreed price.

Hence Log Put, SHort call & Short position in Fwd contract are alternatives to hedge the price fall in future.