Examples illustrating the definition of ‘hedging relationship’

Example 1

A company owns quoted shares which currently have a market value of £1.3 million. It wishes to protect itself from a fall in the value of its investment. It therefore buys a put option from a bank, with a strike price of £1 million, so that if the value of the shares falls below that figure the company can sell them to the bank for £1 million. Its potential loss is therefore limited to £300,000.

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