Hi I need help solving this problem: Suppose that JPMorgan Chase sells call opti
ID: 2795518 • Letter: H
Question
Hi I need help solving this problem:
Suppose that JPMorgan Chase sells call options on $2.00 million worth of a stock portfolio with beta = 2.40. The option delta is .76. 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 $1,000 worth of stock.
How many dollars’ worth of the market-index portfolio should it purchase to hedge its position (Omit the "$" sign in your response.)
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 "$" sign in your response.)
Complete the following: (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)
Assuming the 1 percent market movement, JP Morgan should (Click to select)buysell put contracts. Assume a market movement of 1 percent.
Thank you.
Suppose that JPMorgan Chase sells call options on $2.00 million worth of a stock portfolio with beta = 2.40. The option delta is .76. 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
Soln : a) Let n be the number of market index portfolio required , n = 2000000*delta/100*1000 = 20*0.76 contracts = 16 contracts (approx.)
b) Let d be the delta of the put option need to sell here and it is usder for hedging the call option which are sold, in that case the delta of put option = -delta of call option = -0.76
c) In case of 1 percent of market movement the value of put option will go opposite of it,
So, in case if the market goes up by 1% the put option is to be sold and vice versa.