Kelly manages an investment portfolio. Kelly is considering adding a sizeable investment in Wesfarmers to the investment portfolio. Kelly is concerned about volatility in the share price of Wesfarmers due to recent economic conditions and decides to use an option contract to hedge against the risk of an increase in the price of their shares. The relevant option contract has an exercise price of $47 and a premium of $2.20.

(a) Should Kelly buy or sell a call or a put option if they are concerned that the share price will rise before they can buy the shares? (1 mark)

(b) In what situations would Kelly exercise their option contract? 

(c) Calculate the breakeven point for the option contract.

(d) Calculate the profit/loss on the option contract when the share price is $52 as well as $43. 

(e) Kelly could also have used a futures contract to hedge his risk exposure. Explain the major difference(s) between an option contract and a futures contract.