A fiRm Has a Risk Profile That Depicts a Linear

question 65

Multiple Choice

A firm has a risk profile that depicts a linear positive relationship between changes in prices and changes in firm value. To eliminate the downside risk, the firm should:

• A) Buy a call.
• B) Buy a put.
• C) Sell a call.
• D) Sell a put.
• E) Sell both a call and a put.

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Definitions:

Standard Normal Curve

The graphical representation of a normal distribution that has a mean of zero and a standard deviation of one, used in probability theory and statistics.

Z-score

A statistical measure representing the number of standard deviations a data point is from the mean.

Percentile

An indicator showing the value beneath which a certain percentage of data points in a collection of data lies.

Continuous Random Variables

Variables that can take on any value within a continuous range of values.