You work as a trader for an equity fund. On the first trading day of 2008, you are concerned that your long position (1,000 stocks) in a large company in the U.S equity market is subject to significant downside risks for the year, as some potentially negative news could result in market crashes. However, you have no plans to liquidate your long position until the end of 2008.

a) Devise a strategy involving taking long positions in options to help protect your stock holdings from potentially negative market movements. You should describe the key attributes of the options you use and justify your choices.

b) Assume you implemented the strategy you devised from part a), calculate the month-end (for every holding months) gains/losses for your position with and without hedging, compared with your initial position at the beginning of the year. Was your hedging strategy an effective one? (Hint: you should evaluate the effectiveness of your hedging strategy once you liquidate your stock position at the end of 2008).

c) In early 2008, the popular prediction is that the market will experience a downturn, hence most hedging strategies focus on loss minimisations. Imagine a scenario where prices are extremely volatile, but no one can predict the direction, and you have a long position in stocks. Design two different strategies involving taking long positions in options to minimise losses and capture potential gains. Justify which one is the best. (Hint: you do not need to provide calculations of profit or loss here).

IBM = INTERNATIONAL BUSINESS MACHINE CORP

Option Price	Question
Company name		Date	Stike Price	Bid Price - Call	Ask Price - Call	Bid Price - Put	Ask Price Put	Stock Price
IBM		2-Jan-08	105	12.2	12.5	10.5	10.8	104.69

Monthly Stock	Price
Company	Date	Stock Price
IBM	31-Jan-08	107.11
IBM	29-Feb-08	113.86
IBM	31-Mar-08	115.14
IBM	30-Apr-08	120.7
IBM	30-May-08	129.43
IBM	30-Jun-08	118.53
IBM	31-Jul-08	127.98
IBM	29-Aug-08	121.73
IBM	30-Sep-08	116.96
IBM	31-Oct-08	92.97
IBM	28-Nov-08	81.6
IBM	31-Dec-08	84.16