value: 10.00 points Suppose that JPMorgan Chase sells call options on $1.10 mill
ID: 2787392 • Letter: V
Question
value: 10.00 points Suppose that JPMorgan Chase sells call options on $1.10 million worth of a stock portfolio with beta 1.45 The option delta is .52. It wishes to hedge out its resultant exposure to a market advance by buying a market-index portfolio. Suppose it uses market index puts to hedge its exposure. Each put option is on 100 units of the index, and the index at current prices represents $1,000 worth of stock. a. How many dollars' worth of the market-index portfolio should it purchase to hedge its position (Omit the "$" sign in your response.) Market index portfolio b. What is the delta a put option? (Round your answer to 2 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) The delta a put option is c. Complete the following: (Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Assuming the 1 percent market movement, JP Morgan should sell Assume a market movement of 1 percent. put contractsExplanation / Answer
Therefore, in this question if the index moves up by 1, the stock will also move up but by 1.45 and vice versa.
Delta of on option is the change in option value due to 1$ change in the underlying asset.
Therefore, in this question if the stock portfolio moves up by 1, the call option value will also go up but by 0.52.
Value of market index portfolio to be purchased
= Value of the stock portfolio X Beta of the stock portfolio X Delta of the option
= 1100000 X 1.45 X 0.52
= 829,400
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