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Sir please explain why the question asks us to compute no. of PUT option contracts? the scenario is that we want to hedge against reducing share price. should’nt the hedging strategy be to sell CALL options?
Risk : share price go down
For example :
Share price ( today ) 100
Share price after 2 months : 95
What will be your hedge strategy ? Obviously right to sell now at 100 and buy at 95
( right to sell now is put )Situation after 2 month
Share price 95
Gain on options 5
So risk hedged.P.S it cant be equal because of options premium. Which i didnt consider in example. And wait for tutor reply for more detail.
You could do either – buy PUT options or sell CALL options.
However, if the question asks you to deal in put options then you will buy put options (and therefore have the right to sell at a fixed price, if the share price falls.
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