Question #95

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 45

Status: Unattempted

Correct Answer: A

Part of Context Group: Q94-95
Shared Context
- Fairfax would like to consider neutralizing his Reston equity position from changes in the stock price of Reston. Using the information in Table 3 how many standard Reston European options would have to be either bought or sold in order to create a delta neutral portfolio? A) Sell 334,616 put options. B) Buy 300,703 put options. C) Sell 334,616 call options.
Question
Fairfax has heard people talking about "making a portfolio delta neutral." What does it mean to make a portfolio delta neutral? The portfolio:
Answer Choices:
A. is insensitive to stock price changes
B. is insensitive to interest rate changes
C. is insensitive to volatility changes in the returns on the underlying equity. Gina Davalos, CFA is a portfolio manager for the Herron Investments. She is interested in hedging the equity risk of one of her clients, Lou Gier. Gier has 200,000 shares of a stock with the symbol QJX that he believes could take a dive in the next 9 months. Davalos gathers the following information to suggest potential strategies to offset the potential loss. Each option contract is for 100 options. General Information: QJX Current Stock Price $100.00 Risk-free rate 5.0% QJX Dividend Yield 0.0% Time to Maturity (years) 0.75 Option Information: Strike Price $100.00 Value of Call $12.09 Delta on Call Option 0.6081 Value of Put (years) $8.41 Equity Swap Information:
Explanation
The delta of the option portfolio is the change in value of the portfolio if the stock price changes. A delta neutral option portfolio has a delta of zero. (Module 31.7, LOS 31.l) Gina Davalos, CFA is a portfolio manager for the Herron Investments. She is interested in hedging the equity risk of one of her clients, Lou Gier. Gier has 200,000 shares of a stock with the symbol QJX that he believes could take a dive in the next 9 months. Davalos gathers the following information to suggest potential strategies to offset the potential loss. Each option contract is for 100 options. General Information: QJX Current Stock Price $100.00 Risk-free rate 5.0% QJX Dividend Yield 0.0% Time to Maturity (years) 0.75 Option Information: Strike Price $100.00 Value of Call $12.09 Delta on Call Option 0.6081 Value of Put (years) $8.41 Equity Swap Information: Terms 9 months Settlement frequency Quarterly Fixed rate 6.0% Return on QJX Variable Futures Information: Terms 9 months Current Futures Price $105.50
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