Long position in a stock with a long position in call options so that the value of the portfolio does not change with changes in the value of the stock
Long position in a stock with a long position in call options so that the value of the portfolio does not change with changes in the value of the stock
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.
13. BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of 0.69. What is the number of call options necessary to create a delta-neutral hedge?
14. Return to the previous problem. Will the number of call options written for a delta-neutral hedge increase or decrease if the stock price falls?
15. Which of the following statements regarding the goal of a delta-neutral portfolio is most accurate? One example of a delta-neutral portfolio is to combine a:
a. Long position in a stock with a short position in call options so that the value of the portfolio does not change with changes in the value of the stock.
b. Long position in a stock with a short position in a call option so that the value of the portfolio changes with changes in the value of the stock
c. Long position in a stock with a long position in call options so that the value of the portfolio does not change with changes in the value of the stock
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