Chapter 05 · Section 5.1

Hedging a Short Position 2

Short Spot Long Call Combined Position Position Position

Declining practically expire practically prices: unlimited or sell unlimited profit profit

Increasing unlimited exercise ....... prices: loss

With increasing prices, the combined position has:

a) unlimited loss potential.
No. The possibility of buying the short asset at a predetermined price guarantees the hedger a ceiling on the price at which he must cover his position. Thereby, the loss potential becomes limited.
b) limited loss potential.