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    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?
    A Buy the stock and buy a put option Correct Answer Incorrect Answer
    B Sell the stock and buy a call option Correct Answer Incorrect Answer
    C Buy the stock and buy a call option Correct Answer Incorrect Answer
    D Sell the stock and sell a put option Correct Answer Incorrect Answer
    E Sell the stock and sell a call option Correct Answer Incorrect Answer

    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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