Strategy for hedging-insuring or diversifying

Task 1: You have learned about a number of ways of reducing risk, specifically hedging, insuring, and diversifying. In the table below, place an X in the cell for the technique being used to reduce risk. For each of the following below, identify if it is a strategy for hedging, insuring, or diversifying?

1. Placing an advance order with, which agrees to charge you the lower of the advance price, and the price at the time your order is filled.

2. Purchasing a call option on a stock you think may go up in price.

3. Selling 200 shares of IBM and buying a mutual fund that holds the same stocks as the S&P index.

4. Selling a debt owed to you for $.50 per dollar owed.

5. Agreeing to a long-term contract with a supplier at a fixed price.

6. Agreeing to a no-trade clause with the sports team that employs you.

7. Buying a Mac and a PC.

8. Paying a clown to perform for your child's birthday party six months before the birthday.

Task 2: Suppose you own 100 shares of Dell Inc. stock. Today it is trading at $15 per share, but you're worried Michael Dell might retire again, causing the price to go down. How would you protect yourself against his retirement, assuming you don't want to sell the shares today?

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Finance Basics: Strategy for hedging-insuring or diversifying
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