Using Put Options for Portfolio Risk Management

Medium Risk Management Derivatives In Risk Management

Maria is managing a portfolio for a high-net-worth client and is concerned about a potential decline in the value of equities due to macroeconomic factors. To hedge against this risk, she is considering using put options on a stock index. Maria wants to ensure that the choice of options will effectively manage the downside risk without excessively impacting the potential upside of the portfolio.

Which of the following statements about using put options in the context of risk management for this portfolio is most accurate?

Buying put options on the index will provide Maria with unlimited downside protection, but will also significantly cap potential upside gains.

Put options require an upfront premium payment, which could lead to net loss if the market does not decline; hence, they provide limited downside protection.

Using put options allows Maria to retain full upside potential while also providing a guaranteed minimum price for her client's investments.

Hint

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