Use your own words to describe how an investor can hedge against price risk in managing the

adverse change in stock price for shares that he has purchased.

An investor can hedge against price risk in managing the adverse change in stock price for shares
that he has purchased by options. Options on stock can be used to protect against adverse stock
price movements. A call option grants the owner the right to purchase a specified financial
instrument for a specified price (called the exercise price or strike price) within a specified
period of time. For example, a stock buyer purchases a call option to buy XYZ stock for
RM14.50 that expires in 30 days. After 15 days, the stock buyer notices that the stock has
increased in market value to RM15.50. The stock buyer decides to exercise his right to purchase
the stock for RM14.50 on that day. After purchasing the stock, he has already made a profit of
RM1 per share. On 100 shares, he will have immediately made RM100 minus any broker fees.
For this strategy to work, the call option is exercised or used when the option price is lower than
the current market price of the stock. While a put option grants the owner the right to sell a
specified financial instrument for a specified price within a specified period of time. For
example, say a certain stock buyer has purchased a put option for ABC stock that allows him to
sell the stock for RM50.00 in the next 30 days. He purchased the stock for RM40.00 six months
ago. The stock buyer purchased a put option just in case the stock starts losing value. The stock
buyer notices that within the next 30 days, the ABC stock price keeps dropping. He is thinking,
uh-oh. This is not good. He's going to lose all his money if he doesn't sell. But the stock is
dropping fast and is now at RM42.13. If it drops anymore, then he will not have earned any
money at all. This stock buyer exercises his put option to sell the stock for RM50.00. Now,
instead of just making RM2.13 profit per stock, he has now made RM10 profit per stock.
Because he has purchased the put option, it guarantees him that someday will purchase the stock
at that price from him. The put option is useful when you want to protect yourself from falling
stock prices. You get to sell at a higher price than the current market price.