Chapter 5: Q29I (page 555)
The hedge ratio of an at-the-money call option on IBM is .4. The hedge ratio of an at-the-money put option is -6. What is the hedge ratio of an at-the-money straddle position on IBM?
Ratio is -0.2
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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.
Suresh Singh, CFA, is analyzing a convertible bond. The characteristics of the bond and the underlying common stock are given in the following exhibit:
Compute the bond’s:
a. Conversion value.
b. Market conversion price.
A manager is holding a $1 million bond portfolio with a modified duration of eight years. She would like to hedge the risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bonds is 10 years. How many dollars’ worth of T-bonds should she sell to minimize the risk of her position?
All else being equal, is a put option on a high-beta stock worth more than one on a lowbetastock? The firms have identical firm-specific risk.
All else being equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price?
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