Question 7 (15 marks) Investor A holds 3000 shares in BHP. He bought the shares'several years ago at $5, and the shares are now trading at $8. Bill 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 profit he has made. He decides to hedge his position by buying three puts on BHP; the three-month puts carry a strike price of $7 and are currently trading at $0.2. a. How much profit will investor A make on this deal if the price of BHP does indeed drop to $6 a share by the expiration date on the puts? What if the price drops to $7.5? What if the price goes up to $9? (4 marks) b. What do you see as the main advantages of using puts as hedge vehicles? Is there any other method which can be used as hedge vehicles? (7 marks) c. Please discuss whether the puts with a $7 strike price that A chooses is appropriate to protect the profits? If not, what type of puts would be the most appropriate to protect the profits? (4 marks)