Chapter 05 · Section 5.1
Fixed Hedge
A hedger can protect a short spot position by establishing a fixed hedge with:
a) A long call options position.
b) A long put options position.
With a fixed hedge the hedger has the intention of exercising the option to buy or sell the underlying, if prices move against his position.
A call option gives the holder the right to buy the underlying at a predetermined price.
A put option gives the holder the right to sell the underlying at a predetermined price.