Question #85

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 40

Status: Unattempted

Part of Context Group: Q85-86 First in Group
Shared Context
- If the portfolio has 10,000 shares of the underlying stock and he wants to completely hedge the price risk using options, what kind of options should Franklin buy? A) Call and put options. B) Call options. C) Put options.
Question
Compute the number of shares of stock necessary to create a delta neutral portfolio consisting of 100 long put options in Exhibit 2 and the stock.
Answer Choices:
A. 67.36
B. 32.64
C. −32.64
Explanation
This is simply −100 times the put option delta. Since each share has a delta of 1, we only need 32.64 shares (long) to create a delta neutral portfolio.
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