A firm has a risk profile that depicts a linear positive relationship between changes in prices and changes in firm value. To eliminate the downside risk, the firm should:
A) Buy a call.
B) Buy a put.
C) Sell a call.
D) Sell a put.
E) Sell both a call and a put.

Question

Quizplus · Accepted Answer

Buying a put option allows the firm to hedge against the downside risk by giving it the right to sell the underlying asset at a predetermined price, thus protecting against a decline in the asset's value.

A Firm Has a Risk Profile That Depicts a Linear