We understand standard deviation of returns as a measure of risk and rational investors would like to minimize risk. Notwithstanding this, you may have read that as the standard deviation of returns of the underlying asset increases the value of an option rises. If standard deviation is a measure of risk and investors do not particularly like it, why does it lead to an increase in an option's value? (40-60 words)

Question 2 (5 points)

Assume that you have some shares of stock in ABC Inc. Why do we say that if you also purchase a put option on the same stock, the price paid to buy the put option is like paying an insurance premium? (60-70 words)