4. Investor A holds 3,000 common shares of BHP. He purchased the shares several years ago at $7, and the shares are now trading at $10. He is concerned that the market is beginning to soften. He does not want to sell the shares, but he would like to be able to protect the profits he has made.

a. If he decides to use put options to hedge his position, how many options he should buy? If the put carries a strike price of $9 and is currently trading at $0.20. How much profit will this investor make on this deal if the price of BHP common shares drops to $8 by the expiration date of the puts? What if the price drops to $6? What if the price goes up to $11?

b. Please discuss the advantages and disadvantages of using put options as the hedge vehicle.