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asked Apr 5, 2017 in BUS 4028F - Financial Economics by Dumisani Ngwenza

What do we mean when we say: 

  • a call option involves a positive exposure to the underlying
  • a put option involves a negative exposure

1 Answer

+2 votes
answered Apr 6, 2017 by DanNewton (970 points)
selected Apr 6, 2017 by Rowan
 
Best answer

Positive exposure means that the payoff is high when the underlying's price is high.

Negative exposure means the payoff is low when the underlying's price is high.

commented Apr 6, 2017 by Rowan (3,390 points)
Thanks for answering the question Dan.

Another way of looking at it is that positive exposure means that the value of the option moves in the same direction as the price of the underlying, while negative exposure means that the value of the option moves in the opposite direction to the price of the underlying.

Therefore, because a call option's value increases as the price of the underlying increases, it has positive exposure. Conversely, a put option's value decreases as the price of the underlying increases, thus it has negative exposure.
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