Chapter 5: Q1B (page 511)
We said that options can be used either to scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each.
All option; protective put strategy.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
You build a binomial model with one period and assert that over the course of a year thestock price will either rise by a factor of 1.5 or fall by a factor of 2/3. What is your implicitassumption about the volatility of the stock’s rate of return over the next year?
Several Investment Committee members have asked about interest rate swap agreements and how they are used in the management of domestic fixed-income portfolios.
a. Define an interest rate swap, and briefly describe the obligation of each party involved.
b. Cite and explain two examples of how interest rate swaps could be used by a fixed income portfolio manager to control risk or improve return.
Use the following case in answering Problems 10 – 15 : Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio.
As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.
Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is perfectly hedged against:
a. Small price changes in the underlying asset.
b. Small price decreases in the underlying asset.
c. All price changes in the underlying asset.
Use the Black-Scholes formula to find the value of a call option on the following stock:
Time to expiration = 6 months
Standard deviation = 50% per year
Exercise price = \(50
Stock price = \)50
Interest rate = 3%
Janice Delsing, a U.S.-based portfolio manager, manages an \(800 million portfolio (\)600 million in stocks and \(200 million in bonds). In reaction to anticipated short-term market events, Delsing wishes to adjust the allocation to 50% stocks and 50% bonds through the use of futures. Her position will be held only until “the time is right to restore the original asset allocation.” Delsing determines a financial futures-based asset allocation strategy is appropriate. The stock futures index multiplier is \)250, and the denomination
of the bond futures contract is $100,000. Other information relevant to a futures-based strategy is given in the following exhibit:
a. Describe the financial futures-based strategy needed, and explain how the strategy allows Delsing to implement her allocation adjustment. No calculations are necessary.
b. Compute the number of each of the following needed to implement Delsing’s asset allocation strategy:
i. Bond futures contracts.
ii. Stock-index futures contracts.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
