Problem:
Assume you hold a well-balanced portfolio of common stocks. Under what conditions might you want to use a stock-index (or EFT) option to hedge the portfolio?
Required:
Question 1: Briefly explain how such options could be used the hedge a portfolio against a drop in the market.
Question 2: Discuss what happens if the market does, in fact, go down.
Question 3: What happens if the market goes up instead?
Note: Please explain comprehensively and give step by step solution.