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Assume you hold a well-diversified portfolio of common stocks. Under what conditions might you want to hedge it using a stock index option? a) Explain

Assume you hold a well-diversified portfolio of common stocks. Under what conditions might you want to hedge it using a stock index option?

a) Explain how these options can be used for hedging. Hedging is a strategy which has been designed to reduce the risk of adverse price movements for a given asset.

b) What happens with your hedged portfolio if the stock market will fall?

c) What happens with your hedged portfolio if the stock market will grow?

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