Options for hedging

[free_money]

Hi
How can banks us options for hedging purposes? Do they buy/sell an option depending on spot market?
Thanks for any advice

 

[Calinor]

Example of options used for hedging. Many months ago Oil was trading well over $100. Now this is great for the oil companies. But suppose they think ahead and realise it could go down. Then they could buy a bunch of put options (which are fairly cheap so they can buy a lot of them) with strike 90 say. Now several months later, although they will lose a huge amount of income by the fact that oil is now only trading for around $50, they will at least recoup some of that from their option position. This is hedging. Hedging using options will usually be some form of this. Hedging the options themselves is another issue.

 

[TheBramble]

OIl companies sell oil, but hey also buy oil. It can be a lot more complext than the example you give in real commodities hedging.

They may well have decided selling Calls was the way to go rather than buying Puts if the relative cost of the premium of each dictated that as a more potentially profitable move. And then they need to hedge their forward currency flows too.

I say it's more complex than that. Commodities hedging where the hedger has a relationship with the underlying as a physical deliverable will be delightfully exotic.

 

[Calinor]

Definitely Just a basic example.