Detailed Answer
(b) The requirement is to identify a means of hedging a
decline in the price of stock. Answer (b) is correct because purchasing
a put option on the stock allows the purchaser the option
to sell the stock at the specified price in the future. Thus, if the
price of the stock declines, the value of the put option will increase
by an equivalent amount. Answer (a) is incorrect because
purchasing a call option on the stock provides the company with
an option to purchase stock at a specified price. Answer (c) is
incorrect because selling a put option provides the purchaser
with an option to sell stock at a specified price. Answer (d) is
incorrect because a warrant provides the purchaser with the option
of obtaining additional stock at a specified price.