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Portfolio of common stock

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Assume you hold a well balanced portfolio of common stocks. Under what conditions might you want to use a stock index (of ETF) option to hedge the portfolio?
a) Briefly explain how such options could be used to hedge a portfolio against a drop in the market.
b) Discuss what happens if the market does, in fact, go down
c) What happens if the market goes up instead?

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Solution Summary

The expert briefly explains how such options could be used to hedge a portfolio against a drop in the market. If the market goes down is analyzed.

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ANSWERS

Question A
First, exchange traded funds can be used to reduce the risks exposure of the portfolio. One ETF investment strategy is a covered call which can lock in profits or protect the portfolio in a downside swing. Another strategy is purchasing a covered of ...

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