Suppose you are a farmer and you enter a long put position on corns to hedge...
Suppose you are a farmer and you enter a long put position on corns to hedge your risk. Which of the following cannot help to reduce the cost of insurance?
A. Long another put option with smaller strike price.
B. Choose a smaller strike price instead.
C. Short another call option with higher strike price.
D. Use a short forward position instead.
Homework Answers
C. Short another call option with higher strike price cannot help to reduce the cost of insurance.
Reason-There are several ways to reduce the cost of insurance. In case of hedging against a price decline by purchasing a put option one can reduce the insured amount by lowering the strike price of the put option.
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Suppose you are a farmer and you enter a long put position on
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