Question

A fund manager wishes to insure the minimum value of their stock portfolio against a fall in the value of the ASX 200 market index, but retain potential for a gain should the market index rise. Which of one the following option positions is best suited for their hedging needs?

Select one:
a. Sell put options on the ASX 200 index.
b. Buy put options on the ASX 200 index.
c. Sell futures contracts on the ASX 200 index.
d. Buy futures contracts on the ASX 200 index.

Answer 1

If you want to retain the option to make a gain on the increase in value of ASX 200 but alsoinsure a minimum value, you should buy an option. As you wish to sell the ASX 200 in the future, you should buy a put option. Buying a put option gives you the right but not the obligation to sell a particular underlying at a fixed time and rate in the future for a premium that is paid today. In futures. Both the parties are obliged to conduct the future transaction.

Hence, the option best suited for their heding needs is-

B. But put option on the ASX 200 index.

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