In the beginning of October, an investor has a stock portfolio worth $3,460,000. The content of the portfolio replicates very closely that of the Shanghai SE A share index. The investor wants to ensure that in the end of this year her stock portfolio is at least worth $3,220,000.

At the same time, she would like to reduce the hedging costs stemming from put transactions, and is therefore ready to give up any gain above 9% (calculated from the portfolio value in the beginning of October) till the expiry of options.

In addition, she would also like to earn return higher than riskfree rate in case that stock prices would rise during the maturity of option contracts. In the beginning of October, the Shanghai SE A share index quote is 3460 and prices for the related options that will expire in December 2021 are as follows. The contract size for the Shanghai SE A share index options is 10 which implies that one contract is worth $(10 x strike price). The

expiration date is the third Friday of the expiration month.

Strike price Puts Calls

3220 78 340

3280 98 300

3600 252 136

3780 376 80

Question: Suggest an appropriate hedging strategy.

Answer rating: 100% (QA)

To suggest an appropriate hedging strategy for the investors stock portfolio we need to consider the goals and constraints mentioned in the question T... View the full answer