A few weeks ago, you realised that you were exposed to movements in the price of oil.

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A few weeks ago, you realised that you were exposed to movements in the price of oil. At that time, you hedged this exposure by entering a long call option written on oil.

The call option had a strike price of $90 per barrel. At the time of the option expiry, the spot price of oil is $85 per barrel.

Hedging with options gives you a degree of flexibility. What is the rational decision to make at expiry?

a: Exercise your right to buy oil for $90

b: Impossible to say without knowing the option premium paid for the long call

c: Let the call option lapse

Related Book For answer-question

Fundamental Financial Accounting Concepts

ISBN: 978-0078025907

9th edition

Authors: Thomas Edmonds, Christopher Edmonds

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Posted Date: Dec 17, 2020 10:45 AM

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A few weeks ago, you realised that you were exposed to movements in the price of oil.

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workings From the above working we can conclude that it is Impossi... View the full answer

Fundamental Financial Accounting Concepts

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