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An asset manager has a long position of 8,500 shares of company QTA. The asset manager wants to hedge 55% of the market risk associated with this position. For that purpose, it has been decided to use put options with shares of company QTA as underlying. The absolute value of the delta of this put option is 0.35.
a) What type of risk does delta measure and what are its limitations as a risk measure? Explain your answer.
b) Give an example, explaining its rationale and quantifying it, of a hedging strategy based on the use of put options that the asset manager can implement to reach his hedging objective.
c) Is the following statement "The purpose of a proper risk management strategy, with respect to a certain risk factor, should be to fully eliminate the exposure to that risk factor" true or false? Explain your answer.
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