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29) Which of the following instruments could be used to insure against a possible drop in...

29) Which of the following instruments could be used to insure against a possible drop in the price of stock?

a) Call option

b) Swap contract

c) Put option

d) Forward contract

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Answer #1

Answer is c. Put Option

The reason behind is that Put option is an instrument which gives right to the holder to sell the shares at a specified price and at a predetermined date. Put option insures against a possible drop in the price of stock. Suppose, X wants to sell it's shares and is worried of the fall in prices of the stock in future. X can hold a put option issued by Y to sell the shares to Y at a predetermined price known as the stike price. X must pay a premium to the writer of the contract.

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