Suppose that JPMorgan Chase sells call options on $1.25 million worth of a stock portfolio with beta = 1.5. The option delta is .8. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio.a. How many dollars’ worth of the market-index portfolio should it purchase to hedge its position?b. Now it decides to use market index puts to hedge its exposure. Should it buy or sell puts? How many? The index at current prices represents $1,000 worth of stock.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Suppose that JPMorgan Chase sells call options on $1.25 million worth of a stock portfolio with beta = 1.5. The option delta is .8. It wishes to hedge its resultant exposure to a market
advance by buying a market-index portfolio.
a. How many dollars’ worth of the market-index portfolio should it purchase to hedge its position?
b. Now it decides to use market index puts to hedge its exposure. Should it buy or sell puts? How many? The index at current prices represents $1,000 worth of stock.
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