Which financial instrument gives the holder the option to sell futures as a hedge against falling prices?

Which financial instrument gives the holder the option to sell futures as a hedge against falling prices?

• A. Call option
• B. Put option
• C. Forward contract
• D. Swap

Answer: (B)

Protecting against downside moves with an option on futures. A put option on futures gives the holder the right to sell the futures contract at a specified strike price. If prices fall, the put increases in value and can offset losses on the futures position or on the underlying asset, effectively providing insurance against declining prices. If prices stay above the strike, the put may expire worthless, but you still have the protection if a drop occurs. The other options don’t fit this hedging purpose: a call option is the right to buy, not sell; a forward contract is an obligation to transact in the future, not an option; and a swap is a series of exchanged cash flows, not an option to sell futures.

Protecting against downside moves with an option on futures. A put option on futures gives the holder the right to sell the futures contract at a specified strike price. If prices fall, the put increases in value and can offset losses on the futures position or on the underlying asset, effectively providing insurance against declining prices. If prices stay above the strike, the put may expire worthless, but you still have the protection if a drop occurs.

The other options don’t fit this hedging purpose: a call option is the right to buy, not sell; a forward contract is an obligation to transact in the future, not an option; and a swap is a series of exchanged cash flows, not an option to sell futures.