You are evaluating a stock that is currently selling for $30 per share.Over the investment period you think that the stock price might get as low as $25 or as high as $40.There is a call option available on the stock with an exercise price of $35.Answer the following questions about hedging your position in the stock.Assume that you will hold one share.
What is the hedge ratio?
How much would you borrow to purchase the stock?
What is the amount of your net investment in the stock?
Complete the table below to show the value of your stock portfolio at the end of the holding period.

\begin{array} { | l | l | l | } \hline \text { Scenario } & \text { Low Stock Price } & \text { High Stock Price } \\\hline \text { Value of Stock at Year End } & & \\\hline \text { Repayment of Loan } & & \\\hline \text { Total } & & \\\hline\end{array}

How many call options will you combine with the stock to construct the perfect hedge? Will you buy the calls or sell the calls?
Show the option values in the table below.

\begin{array} { | l | l | l | } \hline \text { Scenario } & \text { Low Stock Price } & \text { High Stock Price } \\\hline \text { Value of Call Position } & & \\\hline\end{array}

Show the net payoff to your portfolio in the table below.

\begin{array} { | l | l | l | } \hline \text { Scenario } & \text { Low Stock Price } & \text { High Stock Price } \\\hline \text { Value of Stock at Year End } & & \\\hline \text { Value of Call Position } & & \\\hline \text { Total } & & \\\hline\end{array}

What must the price of one call option be?

A Portfolio Consists of 225 Shares of Stock and 300

Multiple Choice

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