One advantage of using options to hedge is that the accounting transaction will never require the firm to show large unrecognized losses.

Question

Quizplus · Accepted Answer

This is true because options provide the right, but not the obligation, to buy or sell an underlying asset at a certain price. If the option is not exercised, the only loss is the cost of the option premium. Therefore, the potential losses are known and limited, and the hedging strategy can be accounted for without showing large unrecognized losses.

One Advantage of Using Options to Hedge Is That the Accounting