Question
Derivatives can be used to hedge the risk. A person can
protect himself from downside risk by entering into which of the following position?Solution
Buying a stock and put option on that will give protection against the downside risk. If the price of the stock falls to even zero then the put option can be exercised and amount equivalent to exercise price can be recovered (against the payment of premium). If the price of the stock rises then put will simply expire worthless (against a payment of premium).
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