Question

A customer has a broadly diversified stock portfolio with a current market value of $2,500,000. The customer wishes to hedge the portfolio against a market decline. The customer should:________

A. sell short the exact same stock positions as those held in the portfolio
B. sell 100 SPX 2500 Calls
C. buy 100 SPX 2500 Puts
D. sell long the exact same stock positions as those held in the portfolio

Answer 1

C) buy 100 SPX 2500 Puts

Step-by-step explanation:

SPX stock is based on the Standard and Poor's stock index, so if the investor is worried about a market decline, if he purchases put options and the marker declines, he/she will actually earn money. Each SPX 2500 contract covers approximately $250,000 of portfolio value, so if the investor purchases 10 put options then the whole portfolio would be covered.