Suppose that JPMorgan Chase sells call options on $1.05 million worth of a stock
ID: 2645725 • Letter: S
Question
Suppose that JPMorgan Chase sells call options on $1.05 million worth of a stock portfolio with beta = 1.40. The option delta is .50. It wishes to hedge out its resultant exposure to a market advance by buying a market-index portfolio. Suppose it uses market index puts to hedge its exposure. Each put option is on 100 units of the index, and the index at current prices represents $1,000 worth of stock.
How many dollars
Suppose that JPMorgan Chase sells call options on $1.05 million worth of a stock portfolio with beta = 1.40. The option delta is .50. It wishes to hedge out its resultant exposure to a market advance by buying a market-index portfolio. Suppose it uses market index puts to hedge its exposure. Each put option is on 100 units of the index, and the index at current prices represents $1,000 worth of stock.
Explanation / Answer
Beta of portfolio is 1.40, it means portfolio is 1.4 times more volatile than market.
Index required to be hedged = 1.05*1.04 = 1.092 Million
Size of one put option contract = 100 * 1000 = $100,000
Number of contracts = 1.092 million/100,000 = 10.92 or Approx 11
Market index Portfolio Should be worth 1.092 Million Dollars