Mr. H is holding 100 equity shares of V Ltd. which is being quoted at 2,100 per share. He is interested in hedging downside risk of his holding as…

(i) Since Mr. H holds 100 equity shares, he should buy equal no. of Put option i.e. 100 put options in the same stock to hedge his position. Total Premium amount to be paid = 50 x 100 Put = 5,000 (ii) Net Position after 2-months Share price on exercise day 2,000 2,100 2,200 2,300 2,400 Option exercise Yes Yes No No No Inflow (strike price) 2,200 2,200 Nil Nil Nil Inflow (in open market) - - 2,200 2,300 2,400 Less outflow (premium) 50 50 50 50 50 Position (per share) 2,150 2,150 2,150 2,250 2,350 Total Position 2,15,000 2,15,000 2,15,000 2,25,000 2,35,000 Thus, from above table it can be observed in any case the value of holding of Mr. H in V Ltd. shall not go below - 2,150 per share.