2014 am CFAI Q2 B

[Miamia]

agree on that. What if Price falls below Lower Strike? This position doesn’t provide a full protection. That was how I figured my attempt was not complete.

 

[JSobes]

Miamia wrote:
agree on that. What if Price falls below Lower Strike? This position doesn’t provide a full protection. That was how I figured my attempt was not complete.

That’s the risk you’re taking on by reducing the cost of your hedge, but it is still correct/complete.

 

[Chuckrox8]

A bear put spread does provide some downside protection because if the stock falls in value the long put will increase more in value, to an extent, than the short leg of the spread, but the protection is capped. The question doesn’t ask about fully hedging the stock position just reducing risk.
Questions and Answers:
http://www.cfainstitute.org/programs/cfaprogram/courseofstudy/Documents/...
http://www.cfainstitute.org/programs/cfaprogram/courseofstudy/Documents/...

 

[Miamia]

Thanks JSobes & Chuckrox8! That’s maybe why there’s another question on disadvantage of the proposed strategies.

 

[Audacious]

pokhim]</p> <p>

wrote:
i did limit it to put options u bell!! My question was does a bull put spread work?…

yes. This is what I referred to as : short a put and long a put of 2 different strike prices.