question archive Explain when an option hedge is better than a futures or forward hedge
Explain when an option hedge is better than a futures or forward hedge
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Explain when an option hedge is better than a futures or forward hedge.
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Answer:
Options are better hedge when the buyer is looking for:
1. Usually liquid market. Can be squared off any time.
2. He wants to avoid counterparty default risk.
3. Looking for a Cash settlement.
4. He wants Fixed amount of loss, that is the amount of premium paid. He doesn't want to be bet on Forward/ Future but instead Insures himself by paying a premium.
