Concept explainers
a.
To evaluate: Whether the contract is long or short and states the reason with he help of given information.
Introduction:
Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.
b.
To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.
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.
c.
To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.
Introduction:
Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.
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