Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Develop a strategy to use options to hedge the market value and enhance the profitability of the portfolio. Given the economic forecast, what option/future strategy

Develop a strategy to use options to hedge the market value and enhance the profitability of the portfolio.

Given the economic forecast, what option/future strategy would provide the best way to hedge the portfolio?

a. Bull spread - sell one option and buy another

b. Collar strategy - lock in a floor and ceiling price

c. Bear spread - buy a put option and sell an out of the money call

option 2. Select and price options using CBOE to execute the hedge strategy

3. Identify the number of option contracts that would be required

4. Calculate the total expected return on the portfolio

5. Calculate the net cost of the hedge strategy

6. Create tables of the portfolio and calculations

7. Describe the process used to select and value the options.

8. Describe the financial impact on the portfolio and any market place limitations with executing the strategy.

9. What is the risk to the portfolios market value and return if the economic forecast is wrong? Start by selecting a strategy of a collar, bull spread, or bear spread.

Start by selecting a strategy of a collar, bull spread, or bear spread.Using the information from FA 3 you should have the expected future price of each stock and the expected total return.CBOE provides the best free source for all option pricing.The address is:http://www.cboe.com/delayedquote/quotetable.aspx.Enter the stock's ticker and the desired chain and maturity and CBOE will provide the quotes.As your looking at the options, mentally note the open interest, trading volume and implied volatility.These will effect price and liquidity.The options prices should be entered into Excel spreadsheet and format similar to the example provided. To identify the number of contracts, build out the Excel spreadsheet similar to the example provided.This means first using the portfolio weights to determine the market value of each stock in the portfolio.To determine the number shares, divide the market value by the price.Setup a column with the net option cost and calculate the total cost of the hedge for each stock by multiplying the # shares by the net option cost.Determine the number of contracts required by dividing the number of shares by 100, which represents the fact that 1 contact controls 100 options.Calculate the total expected return on the portfolio, the cost of the hedge and then the net return on the portfolio including the hedge cost. then written analysis of the table and stepsthat were taken and why you chose various options and strategies.Follow the example provided for both content and analysis.It's not that difficult.Just explain what you did, the results and limitations.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Analysis for Financial Management

Authors: Robert c. Higgins

8th edition

73041807, 73041803, 978-0073041803

More Books

Students also viewed these Finance questions

Question

Consider the following four structures: (i) See Figure 9.23:

Answered: 1 week ago

Question

What are the APPROACHES TO HRM?

Answered: 1 week ago

Question

What do you mean by dual mode operation?

Answered: 1 week ago

Question

Explain the difference between `==` and `===` in JavaScript.

Answered: 1 week ago