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Options - are contracts that give the holder the right, not obligation to buy or sell the...

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Finance

Options - arecontracts that give the holder the right, not obligation to buy orsell the underlining asset at a specific price and time.These canbe used as hedging strategies and speculation. How and why areoptions used to protect holdings of corporations? Also forInvestors? Provide an example along with an advantage anddisadvantage along with your opinion on them.

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As rightly said options are contracts that give the holder the right but not the obligation to buy or sell the underlying asset at a specific price and time and are used by organizations as well as the investors for speculating as well as for hedging purpose The ways in which corporations use options to protect the holding companies is as follows 1 Forex risk reduction There could be a case that a holding company of a parent company might be located in a different company In this way the profits received could be correlated with the exchange rate between the two countries So the forex fluctuations could lead to the fluctuating profits for the parent company To hedge this risk the parent company may get into the respective options    See Answer
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