1. An investor did some analysis and believes that a stock is undervalued. However, the investor is not sure about the direction of the stock market. If the investor holds 100,000 shares of the stock. The market price is $38 per share. The investor is interested in hedging against movements in the market over the coming months and decides to use the December Mini S&P 500 futures contract. The index futures price is 3,800 and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. What position in the futures contract should the investor take to hedge the market (systematic) risk fully?

A. A short position in 26 contracts is required.

B. A long position in 50 contracts is required.

C. A long position in 26 contracts is required.

D. A short position in 50 contracts is required.

2. Suppose you own 5,000 shares of a stock, which are worth $25 each. How can options be used to provide you with insurance against a decline in value of your holding over the next four months?

	A.	You should buy 50 put option contracts (each contract is on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exercise the option and sell the shares for $25 each.
	B.	You should buy 50 call option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exercise the option and sell the shares for $25 each.
	C.	You should buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be more than $25, you can exercise the option and buy the shares for $25 each.
	D.	You should buy 50 call option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be more than $25, you can exercise the option and buy the shares for $25 each.