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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? (3 marks)

Assume you hold a well-diversified portfolio of common stocks.

Under what conditions might you want to hedge it using a stock index option? (3 marks)
Explain how these options can be used for hedging. (3 marks)
What happens with your hedged portfolio if the stock market falls? (3 marks)
What happens with your hedged portfolio if the stock market grows? (3 marks)

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