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.
b) limited loss potential.
The call gives the hedger the right to buy the short asset at a predetermined price.