A Comparison
There is a fundamental di erence between the use of forward contracts and options for hedging. Forward contracts are designed to neutralize risk by xing the price that the hedger will pay or receive for the underlying asset. Option contracts, by contrast, provide insurance. They o er a way for investors to protect themselves against adverse price movements in the future while still allowing them to benet from favorable price movements. Unlike forwards, options involve the payment of an up- front fee.