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Question
You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co.
Suppose the desired put options with X = 50 were traded. What would be the hedge ratio for the option?
A. -1
B. -.5
C. .5
D. 1
Answer
This answer is hidden. It contains 47 characters.
Related questions
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Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?
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B. A price-weighted index
C. A value-weighted index
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Q:
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B. $37,500
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Q:
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Q:
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Q:
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Q:
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Q:
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Q:
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Q:
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Q:
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Q:
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Q:
You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.
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A. 0
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D. The answer cannot be determined from the information given.