Hedging Market Risk with Options

Very Hard Risk Management Managing Market Risk

As a portfolio manager, you are tasked with reassessing a client’s investment strategy due to significant recent market volatility. Given the client's risk tolerance, investment horizon, and current market conditions, you consider implementing various hedging strategies to manage market risk effectively. One proposed strategy involves utilizing options and futures to mitigate potential portfolio losses while maintaining exposure to equities.

Which of the following statements accurately describes a potential drawback of using options for hedging market risk?

Options can be subject to time decay, which may erode the value of hedges during prolonged market downturns.

Options provide unlimited risk protection, ensuring the portfolio is shielded from adverse price movements.

Options are more cost-effective than direct equity investments, resulting in lower total portfolio expenses during adverse market conditions.

Hint

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