Please answer in details if possible, thank you. Data for Questions 1 and 2: You
ID: 2803542 • Letter: P
Question
Please answer in details if possible, thank you.
Data for Questions 1 and 2: You have decided to buy protective put options to protect the your stock holdings of Global Advisers Company’s (GAC) from a potential price decline over the next three months. You have researched Russell 300 index options and have assembled the following information: Russell 300 is currently at $365, and the premium of an at-the-money 3 month Russell 300 put option is $10.25. The beta of Russell 300 is 0.95; the beta of GAC’s portfolio is 1.05.
1. Suppose there is a $1 drop in GAC’s price. By how many dollars should the price of Russell 300 have dropped in a CAPM universe?
A) 2.2/3.3 B) 0.95/1.05 C) .65/.85 D) None of the above (Ans: $1 drop in GAC implies a $(1/1.05) fall in the market, which implies a $(0.95)*(1/1.05) drop in Russell 300)
2. What is the total amount you have to spend on the Russell 300 at-the-money puts to protect GAC’s portfolio from loss if you have 500 shares of GAC.
A) $500*(0.95/1.05) B) $500*(0.66/0.85) C) $300*(2.2/3.3) D) None of the above
3. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the- money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-themoney puts and your maximum gain is __________. A) greater; lower B) greater; greater C) lower; greater D) lower; lower
4. 18. The Treasury yields for 1yr and 2yrs are 6% and 6.2% respectively. If the Expectations theory holds, what is the forward rate between 1 and 2 years?
A) 6% B) 6.4% C)7% D) None of the above
Explanation / Answer
1)
Option B
1 dollar drop in GAC implies a 1/1.05 fall in the market
It implies a (0.95)*(1/1.05) drop in Russell 300
2)
Option A
For one share we need to spend 0.95 / 1.05
for 500 shares = 500*(0.95/1.05)
3)
Option B
greater; greater
4)
Fwd(1,2) = ( (1+6.2%)2 / (1+6%) ) - 1 = 6.4% (Option B)