Question
1. An investor did some analysis and believes that a stock is undervalued. However, the investor is not sure about the direction of the stock
1. An investor did some analysis and believes that a stock is undervalued. However, the investor is not sure about the direction of the stock market. If the investor holds 100,000 shares of the stock. The market price is $38 per share. The investor is interested in hedging against movements in the market over the coming months and decides to use the December Mini S&P 500 futures contract. The index futures price is 3,800 and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. What position in the futures contract should the investor take to hedge the market (systematic) risk fully?
A. A short position in 26 contracts is required.
B. A long position in 50 contracts is required.
C. A long position in 26 contracts is required.
D. A short position in 50 contracts is required.
2. Suppose you own 5,000 shares of a stock, which are worth $25 each. How can options be used to provide you with insurance against a decline in value of your holding over the next four months?
A. | You should buy 50 put option contracts (each contract is on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exercise the option and sell the shares for $25 each. | |
B. | You should buy 50 call option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be less than $25, you can exercise the option and sell the shares for $25 each. | |
C. | You should buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be more than $25, you can exercise the option and buy the shares for $25 each. | |
D. | You should buy 50 call option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months the stock price proves to be more than $25, you can exercise the option and buy the shares for $25 each. |
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