A few weeks ago, you realised that you were
exposed to movements in the price of oil. At that time, you hedged this exposure by entering
a long put option written on oil.
The put option had a strike price of $90
per barrel. At the time of the option expiry, the spot price of oil is $105 per
barrel.

Hedging with options gives you a degree of
flexibility. What is the rational decision to make at expiry?

Question

A few weeks ago, you realised that you were
exposed to movements in the price of oil. At that time, you hedged this exposure by entering
a long put option written on oil.  
 The put option had a strike price of $90
per barrel. At the time of the option expiry, the spot price of oil is $105 per
barrel.

Hedging with options gives you a degree of
flexibility. What is the rational decision to make at expiry?

Answer

Exercise your right to sell oil for $90

Answer

Let the put option lapse

Answer

Impossible to say without knowing the option premium paid for the long put

Crowdly

A few weeks ago, you realised that you were exposed to movements in the price o...

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