An investor intends to sell their holding of 5000 ANZ shares next month and is concerned the share price may fall.Which of the following would be most suitable to hedge this transaction?

Question

Quizplus · Accepted Answer

Long puts would be the most suitable choice for hedging as they provide the holder with the right to sell the shares at a predetermined price (strike price) until a certain date (expiration date). If the share price falls, the value of the put option will increase, providing a gain to offset the loss in the share price. If the share price increases, the holder can simply let the option expire and sell the shares at the higher market price. Long calls (option to buy shares) and Short calls (obligation to sell shares) would not provide effective hedging for a potential price drop, while short puts (obligation to buy shares) and long SPI futures (a type of futures contract) involve taking on additional risks and obligations.

An Investor Intends to Sell Their Holding of 5000 ANZ