bkmsol_ch21

# Therefore salomon brothers should purchase 1500000 of

This preview shows page 18. Sign up to view the full content.

Therefore, Salomon Brothers should purchase \$1,500,000 of the market index portfolio in order to hedge its position so that a 1% change in the index would result in a \$15,000 change in the value of the portfolio. b. The delta of a put option is: 0.8 – 1 = –0.2 Therefore, for every 1% the market increases, the index will rise by 10 points and the value of the put option contract will change by: delta × 10 × contract multiplier = –0.2 × 10 × 100 = –\$200 Therefore, Salomon should write: \$12,000/\$200 = 60 put contracts 47. If the stock market index increases 1%, the 1 million shares of stock on which the options are written would be expected to increase by: 0.75% × \$5 × 1 million = \$37,500 The options would increase by: delta × \$37,500 = 0.8 × \$37,500 = \$30,000 In order to hedge your market exposure, you must sell \$3,000,000 of the market index portfolio so that a 1% change in the index would result in a \$30,000 change in the value of the portfolio. 21-18
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Ask a homework question - tutors are online