Question: Given the following information, answer the question step by step. Mary is holding apple stock now priced at $50 per share. The following securities are

Given the following information, answer the question step by step.

Mary is holding apple stock now priced at $50 per share. The following securities are also traded in the market now:

Apple Futures: futures price $55 per share, expiry 1-month later.

Apple Call option: exercise price $50 per share, expiry 1-month later, option premium $3.

Apple Put option: exercise price $50 per share, expiry 1-month later, option premium $5.

a) Mary wants to hedge against the downside risk of holding HSBC stock. Identify the option strategy she should use and describe with a diagram the profits of Marys hedged portfolio on the expiry date of the option.

b) Mary wonders if it would be better to use futures contract instead of option for hedging purpose. Advise Mary what futures position she should engage, and the advantages and the disadvantages of using futures instead of option for hedging purpose.

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