q 13

13. You are meeting with a pension plan sponsor who asked your advice on several invest- ment policy guidelines formulated for its asset managers. One of the guidelines involves the use of options for hedging: Protective put buying and covered-call writing strategies are recognized by the investment com- munity as means for hedging a stock position. The former will not be permitted by any of our fund managers becausc it involves a cost that may not be recouped if the put option is not exer- cised. We will permit covered-call writing because there is no cost generated to protect the portfolio What advice would you give the plan sponsor concerning this investment policy guide- line? 19