Series 7 - General Securities Representative Exam
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A hedge fund is short 3 million dollars of small cap stocks. He is concerned about a market reversal to the upside and wants to hedge the portfolio. Which of the following is he MOST likely to do?
Buy SPX puts
A
Buy RUT calls
B
Sell RUT call spreads
C
Sell the 10 delta DJIA calls via the DIA ETF
D
Explanations
The hedge fund is short small cap stocks. To hedge, they can buy RUT Russell 2000 calls. This index represents 2000 small cap stocks. SPX is large cap stocks. Selling calls will not hedge effectively, it will produce potential income