Robert manages an investment portfolio. One company, Rio Tinto, makes up a significant proportion of their portfolio. Robert is concerned about volatility in the share price of Rio Tinto due to a recent announcement and decides to use an option contract to hedge against the risk of a downturn in the value of their shares. The relevant option contract has an exercise price of $88 and a premium of $3.40.

1. Should Robert buy or sell a call or a put option if they are concerned that the share price will fall before they can sell the shares?

2. In what situations would Robert exercise their option contract?

3. Calculate the breakeven point for the option contract.

4. Calculate the profit/loss on the option contract when the share price is $81 as well as $92.

5. Robert could also have used a futures contract to hedge his risk exposure. Explain the major difference(s) between an option contract and a futures contract.