Stock Hedging

Case 14.2: Fred's Quandary�To Hedge or Not to Hedge

There are two types of stock options. The first type is a put option, which provides the holder with a right to sell 100 shares of a stipulated publicly traded common stock over a specified period of time. The second type is a call option, which provides the holder with a right to buy 100 shares of a stipulated publicly traded common stock over a specified period of time. The specified times are typically nine-months or less.

In addition to the definitions of put options and call options, there are four other relevant terms associated with stock options contracts. These four terms are as follows:

1. European option. A European option is one which can be exercised only on its maturity date, and on which there are no cash dividends paid on the underlying common stock.

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Category: Economics - S