Suppose that JPMorgan Chase sells call options on $1.35 million worth of a stock portfolio with beta = 1.70. The option delta is 0.70. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio. Suppose it use market index puts to hedge its exposure. 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?

Question

Corbin Reeves

Business

19 July, 23:12

Suppose that JPMorgan Chase sells call options on $1.35 million worth of a stock portfolio with beta = 1.70. The option delta is 0.70. It wishes to hedge its resultant exposure to a market advance by buying a market-index portfolio. Suppose it use market index puts to hedge its exposure. 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?

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Zander · Answer 1

Particulars Amount Explanation

Call options 1350000

Beta of stock 1.7

Delta 0.7

Market change 1% Implied stock change is 1.7

Stock changes by 1.7 1.19 Implied exposure on call

options on stock (ie 1.7*0.7)

Amount of exposure 1606500 Derived by multiplying

1.19*1,350,000

Hence market index portfolio worth $1,606,500 should be bought, however the market index portfolio trade in multiples of 1000 hence $1,607,000 worth should be obtained to hedge the exposure