A customer is short 100 shares of DFI at 35 and the market price is 35.25. If he believes a near-term rally will occur, which of the following strategies would best hedge his position?

A) Write a DFI put with an exercise price of 40. B) Buy a DFI call with an exercise price of 40. C) Buy a DFI call with an exercise price of 35. D) Write a DFI call with an exercise price of 40.

Question

Business

Philip Hatfield

10 August, 23:59

A customer is short 100 shares of DFI at 35 and the market price is 35.25. If he believes a near-term rally will occur, which of the following strategies would best hedge his position?

A) Write a DFI put with an exercise price of 40. B) Buy a DFI call with an exercise price of 40. C) Buy a DFI call with an exercise price of 35. D) Write a DFI call with an exercise price of 40.

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Answers (1)

Know the Answer?

Uriah Bennett · Answer 1

C) Buy a DFI call with an exercise price of 35.

Explanation:

A Call is a buy option of 100 shares, in this case, of DFI. It has an exercise price, that represents the number of comparison with the market price. If the market is lower than the exercise, the call expires without earnings (only the premium that is paid when you buy it). If the market is higher than exercise, then the profit is the differen between the two prices. So, if the customer is short with 100 shares (expecting a lowering of prices), but he believes that a near-term rally is going to happen, then he can buy this option, and cover his losses when the prices rise.