Laura has an equity portfolio valued at $11.2 million that has a beta of 1.32. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1402. The option delta is .582. What would Laura's strategy be if she were to effectively hedge her portfolio with call options? What would her strategy be if she decided to use put options?
Q: a 20-year study 7.24 You work for the New Mexico Department of Transportation (NMDOT). Two proposals…
A: Step 1:(a) Use a B/C analysis and a discount rate of 8% per year to evaluate the proposals.The…
Q: BSM model. Mars Corp. common shares are trading at $46 on the market. Currently, the continuously…
A: Black-Scholes Model Calculations for Mars Corp. Options (with approximations)Given:Stock Price (S) =…
Q: ADMN 2906 Discussion Forum #2 In this discussion I would like you to share your experience(s) with…
A: I have done as asked. I already made a possible response to a fellow participant's post in number 2,…
Q: 1 2 We are evaluating a project that costs $845,000, has an eight-year life, and has no salvage…
A: a. Accounting break-even point and Degree of Operating Leverage (DOL): 1. **Depreciation per…
Q: Hi there, I am working on this problem from my textbook, can you please show me the steps in solving…
A: Net present value (NPV) is the difference between the present value of cash inflows and the present…
Q: Finance 500 In this assignment, the purpose is to tie into the key concepts and insights studied…
A: In my role as a project manager in the design industry, I've found that the principles learned in…
Q: Which of the following statements are CORRECT? Check all that apply: The aftertax cost of debt…
A: The aftertax cost of debt decreases when the market price of a bond increases: The aftertax cost of…
Q: McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $841 per set and…
A: The objective of this question is to determine the sensitivity of the Net Present Value (NPV) to…
Q: A BBB-rated corporate bond has a yield to maturity of 8.9%. A U.S. Treasury security has a yield to…
A: The objective of the question is to calculate the price of the Treasury bond and the BBB-rated…
Q: Vijay
A: b. To calculate the APV (Adjusted Present Value) of the project, we need to calculate the net…
Q: Bhupatbhai
A: Approach to solving the question: To solve this question, we utilize the formula for calculating the…
Q: Bhupatbhai
A: hedge a $360million pension fund with a beta of 1.30 against market decline, you plan to use SPX…
Q: Cat Supplies offers terms of 1/10, net 35. The discount is taken by 77 percent of customers. What is…
A: Average Collection Period = (Discounted Days * % of Customers Taking Discount) + (Full Days * % of…
Q: Bhupatbhai
A: The calculation you provided breaks down the cash flows for each year of the project. Let's analyze…
Q: Problem 11-14 (Algo) Charlie's Pizza orders all of its pepperoni, olives, anchovies, and mozzarella…
A: Step 1: Calculate Demand During Lead TimeFirst, we calculate the expected demand during the 3-week…
Q: Use the savings plan formula to answer the following question:. Suppose you find a fund that offers…
A: Formula:The future value of a series formula is:FV=P×( ((1+r)n−1)/ r)Where:• FV is the future value…
Q: None
A: We can determine the bond's yield to maturity (YTM) using the following information: Face value (FV)…
Q: Raghubhai
A: Given information: Pretax cost of debt (Kd) = 7% Cost of preferred stock (Kp) = 6% Cost of equity…
Q: Congratulations! You are the sole winner of the $10 million jackpot lottery. You can choose to take…
A: Given information: Annual payout (PMT) = $250,000 Number of periods (N) = 20 Interest rate per…
Q: 7.16 The cash flows associated with a public works project in Buffalo, New York, are shown. Use the…
A: To determine the economic justification of the public works project in Buffalo, New York, we will…
Q: Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30…
A: Certainly! The question asks us to find the level of operating income at which Sand Key would be…
Q: please answer correctly fast please:
A: To calculate the beta of a portfolio given the expected return on the portfolio (E(rp)), the…
Q: Alset Inc. just paid a $2.30 dividend, and its dividends are expected to grow at the rate of 12% for…
A:
Q: Required information [The following information applies to the questions displayed below.] A pension…
A: When building an effective portfolio, it is necessary to optimise the allocation of assets in order…
Q: A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a…
A: Here's a breakdown of the components and how the circuit works:Components:Battery (Vcc): Provides…
Q: Al-Biruni Inc. borrowed $10 millions at the beginning of 2022 with an annual interest rate of 9.5%.…
A:
Q: Exercise 9-11 (Algo) Computing payroll taxes LO P2, P3 Mest Company has nine employees. FICA Social…
A: Employee Payroll Tax Calculations (without table)FICA Social Security:Total wages subject to tax:…
Q: Table 3.6 Yield Curve on May 15, 2000 2/2 ield Maturity Yield Maturity Yield 0.25 6.33% 2.75 6.86%…
A: (a) 3-year zero coupon bond: \[ D_a = \frac{{1 \cdot 1000}}{{(1+0.0676/2)^6}} \div…
Q: Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in…
A: Dividend of stock A:$25=D/(15%-10%)$25*5%=DD=$1.25Dividend of stock B:$25=D/(15%-5%)$25*10%=DD=$2.5…
Q: 11.
A: The below Excel sheet contains the detailed procedure to calculate the answers:
Q: There is a bond with a coupon of 7.4 percent, six years to maturity, and a current price of…
A: Step-by-Step Process: 1. Calculating the Yield to Maturity (YTM):The YTM is the interest rate that…
Q: None
A: A variable budget is designed to be flexible and adaptable to changes in environmental conditions or…
Q: A firm is considering Projects S and L, whose cash flows are shown below. These projects are…
A: To determine how much potential value the firm would lose if the wrong decision criterion is used…
Q: 5:41 Vo LTED 96 expert.chegg.com/qna/authorin C Time Left: 01:59:45 Student question An investor…
A: Now, let's sum up the outcomes of each trade:- Profit from buying the stock = Market price -…
Q: Allan decides to invest in a new company which would allow him to receive $ 250,000 at the end of…
A: Step 1: Total Cost of InvestmentAllan purchases 100,000 shares at $6.50 per share. Therefore, the…
Q: None
A: 4. Equivalent Annual Cost (EAC):EAC = TPV / Annuity Factor (Present Value of an Annuity of $1 for N…
Q: The price of a product is 30 dollars per unit. A firm can produce this good with variable costs of…
A: In above answer, In the first problem, we calculated the breakeven output level for a firm that…
Q: A project yields the following set of cash flows. What is the internal rate of return of this…
A: Step 1 : Apply irr formala Step 2: cf0+cf1/(1+irr)2........................cfn/(1+irr)n Step 3: Step…
Q: A project will produce an operating cash flow of $7,500 a year for 8 years. The initial fixed…
A: 1. Define the Cash Flows:The first step is to identify the cash flows associated with the project.…
Q: Radhubhai
A: To calculate the Adjusted Present Value (APV) of the project, we need to follow these steps:1.…
Q: You are managing a pension plan that is due to pay $11 million a year for 15 years with the first…
A: The objective of the question is to calculate the number of zero coupon bonds needed to immunize a…
Q: What is the future value of $3,300 in 20 years at an APR of 8.6 percent compounded semiannually? (Do…
A: Future Value = Present value*(1+Interest rate)^No. of periods Where,Present Value = $3,300Interest…
Q: None
A: Step 1:a)We have to calculate the cost of equity. We have to use the dividend growth model to…
Q: The price of a home is $180,000. The bank requires a 5% down payment and one pointat the time of…
A: a. Required Down PaymentThe down payment required is 5% of the price of the home.Given:• Price of…
Q: Problem 16-09 (Cost of Trade Credit) Question 5 of 7 ▸ Check My Work Cost of Trade Credit Grunewald…
A: The problem involves calculating the nominal and effective costs of trade credit for Grunewald…
Q: Raghubhai
A: 2. Keebler Cookie Munster:Repeat the same process for the Keebler Cookie Munster oven, using its…
Q: On a risk-adjusted basis, does socially responsible investing (SRI) have a differential impact on…
A: Socially responsible investing (SRI) involves considering environmental, social, and governance…
Q: Suppose we are thinking about replacing an old computer with a new one. The old one cost us…
A: Calculations:A. Equivalent Annual Cost (EAC) for Old Computer (Year 0):1. Tax shield from…
Q: You are the vice president of finance for Neptune Enterprises, Inc., a manufacturer of scuba diving…
A: Part 2:Explanation:Step 1: Determine the inflation-adjusted future value of the required amount.\[…
Q: The Rhaegel Corporation's common stock has a beta of 1.2. If the risk-free rate is 3 percent and the…
A: Step 1: The calculation of the company's cost of capital AB1Beta1.22Risk-free rate3%3Market…
Laura has an equity portfolio valued at $11.2 million that has a beta of 1.32. She has decided to hedge this portfolio using SPX call option contracts. The S&P 500 index is currently 1402. The option delta is .582. What would Laura's strategy be if she were to effectively hedge her portfolio with call options? What would her strategy be if she decided to use put options?
Step by step
Solved in 2 steps
- the possibility that an investment portfolio will not generate the investor's expected rate of return. Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio. Consider the following case: Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: Stock Artemis Inc. Babish & Co. Cornell Industries Danforth Motors What is the expected return on Andre's stock portfolio? O 11.10 % 14.99% 8.32% Percentage of Portfolio Expected Return 20% 30% 35% 15% 16.65% 8.00% 14.00% 13.00% 5.00% Standard Deviation 27.00% 31.00% 34.00% 36.00% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.4 (p 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 32%, the portfolio's standard deviation…Donna Donie, an option analyst at UMB Students Managed Fund, believes that the market will be volatile in the near future, but Donie does not feel particularly strongly about the direction of the movement. With this expectation, Donie decides to buy both a call and a put with the same exercise price and the same expiration on the the TRT stock trading at 528. Donie buys one call option and one put option on TRT stock with the following exercise price and the premiums. TRT Materials Option Pricing Data (U.S.S) What is the name of the equity option strategy Donie has taken for the position? Characteristic Call Option Put Option Premium 54 S1 Strike Price $25 $25 Time to Expiration 90 days from now 90 days from now A. Bull spread strategy B. Straddle strategy C. Strangle strategy D. Protective put strategyAn investor owns a stock that is currently valued at $45.80 a share. She is concerned that the stock price may decline so she just purchased a put option on the stock with an exercise price of $45. Which one of the following terms applies to the strategy she is using? Put-call parity. Covered call. Protective put. Straddle. O Strangle.
- By looking at the sensivities of your portfolio to ds = -$2 and So = -1%, you decide to hedge delta, gamma and Vega risk of your portfolio with the underlying stock and two different options on the same asset with below data. Calculate the units of stock you need to trade to hedge away all delta, gamma and Vega risks of your portfolio.(Note that here you have to calculate the units of stock, Option A and Option B, but you will only submit the units of stock.) Variable Option A Option B Delta (A) -0.5 0.2 Gamma (T) 0.2 0.1 Vega (v) 8Sarah purchases a call of CBA with exercise price $55 and sells a call of CBA with exercise price $50, both call options have the same expiration date. a. Draw the payoff diagram for her strategy as a function of the stock price at expiration. b. Draw the profit/loss diagram for this strategy as a function of the stock price at expiration. (hint: which option has a higher premium?).answer must be correct or i will give down vote
- 9. You are looking to hedge your risk with respect to some shares of Apple stock that you own. To do so, you examine some put options. . As the price of Apple stock rises, what will happen to the value to the put options you are examining? Why? • One put option you are interested in expires in July and another expires in August. Which will have a higher price? Why? • What will happen to the price of the put options if, all of a sudden, the volatility of Apple's share price declined?Anna holds a portfolio comprising the following 3 stocks: X, Y and Z. Investment Amount Beta. Expected return Security X $2000. 1.3. Security Y $1000. 1. 10% Security Z. $500. 0. 2% a. Determine the expected return of security X. b. Calculate the return of Anna’s portfolio. c. Calculate the beta of Anna’s portfolio. d. To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio’s systematic risk? How would portfolio expected return change (higher or lower) if you add this security?(a) Determine the expected return of security X (b) To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio’s systematic risk? How would portfolio expected return change (higher or lower) if you add this security?
- Elizabeth intends to use the Hang Seng Index (HSI) futures to hedge her portfolio. Which of the followings is her least concern with respect to using the HSI futures contract? a) Expiry of the futures contract b) Current level of Hang Seng Index c) Systematic risk of her portfolio d) Volatility of the stock market e) Risk‐free rateYou want to use S&P 500 index options to hedge your portfolio. • Portfolio has a beta of -1.0. • It is currently worth $500,000 and index stands at 1000. • The risk-free rate is 0% per annum. • There is no dividend yield on both the portfolio and the index. 1) What option contracts would you consider? 2) How many option contracts should be purchased? 3) What strike price should we consider for insurance against the portfolio value falling below $450,000 in three months? 4) What happens if index level turns out to be 1200 after three months?Jim Bowles is an investor who believes the economy is gaining strength and therefore wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000 and the current beta of the portfolio is 1.02. The beta of the least risky security is 0.76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?