Harmostrax Co. has a defined-benefit pension plan for its employees. To fund the plan, the company makes periodic contributions to a stock investment fund. If the stock market declines significantly, the company would have to make additional contributions to make up for lost revenue. The company could hedge its risk of a market downturn by periodically purchasing put options on the stock market.

Question

Quizplus · Accepted Answer

By purchasing put options on the stock market, Harmostrax Co. can protect itself against a potential decline in the stock market, allowing it to make additional contributions to its defined-benefit pension plan without suffering significant losses.