You sold short 2,000 shares of a company for $40.00 per share in May 2022. You are worried about the market turning bullish, so you decide to buy 20 call options on the company's shares with each contract written on 100 shares at an exercise (or strike) price of $40.00 expiring in July 2022 for a premium of $2.00 per share.

 

a)What is the rationale behind entering this call option hedge? 

 

b)If at expiration the company's share price is $36.00, calculate the total profit or loss on your hedged position.

Answer rating: 100% (QA)

a The rationale behind entering this call option hedge is to protect against potential losses in cas... View the full answer