The option delta is .80. It wishes to hedge out its resultant exposure to a mark
ID: 2786268 • Letter: T
Question
The option delta is .80. 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 $1,000 worth of stock. a. How many dollars' worth of the market-index portfolio should it purchase to hedge its position (Omit the "$" sign in your response.) Market index portfolio b. What is the delta a put option? (Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) The delta a put option is c. Complete the following: (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Assuming the 1 percent market movement, JP Morgan should sell4 Assume a market movement of 1 percent. put contractsExplanation / Answer
a) Given Data:
Worth of stock portfolio = $ 1.25Mn
Beta of stock = 1.5
Delta of stock= .8
Assume Market index up by 1% , the shares will be respond by 1.5% as the beta is 1.5
= .015*$1250000 = $ 18,750
The option would up by option delta .08
=.8*18750 =$15000
1% change in the index result in a change of $15000 in the portfolio. therefore to completely hedge the position, the investor should purchase market index worth $ 15000*100= $1500000.