Chapter 21, Problem 48PS

a.

Summary Introduction

To calculate: Increment in option portfolio and of how much worth of market-index portfolio should JP Morgan purchases to be ahead.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

b.

Summary Introduction

To calculate: The number of put option to buy or sell when $1000 worth of stock is represented by index at current price.

Introduction:

Put option: It is a contract in which certain right is given to sell the underlying asset to any person or organization at a price fixed irrespective of changes in market prices during the agreed period of time.