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Question 4, round your answer to integer (15 marks) A fund manager has a well-diversified portfolio that mirrors the performance of the Hang Seng
Question 4, round your answer to integer (15 marks) A fund manager has a well-diversified portfolio that mirrors the performance of the Hang Seng Index and is worth $1 billion. The value of the Hang Seng Index is 28,000, and the portfolio manager would like to use a covered call strategy with strike price 5% above the current level over the next three months. The risk-free interest rate is 1% per annum. The dividend yield on both the portfolio and the Hang Seng Index is 2%, and the volatility of the index is (3 x Y + 20)% per annum. a. If the fund manager trades European call options, how much would the manager spend on trading the call? (5 marks) b. Explain alternative strategies open to the fund manager involving European put options, and show the amount of money the fund manager will deposit to or borrow from bank. (4 marks) c. If the fund manager decides to maintain a delta with the same as covered call without using any options, how much stocks the fund manager has to sell? (3 marks) d. If the fund manager decides to maintain a delta with the same as covered call using futures, how many futures contracts the fund manager has to trade? Assume the multiple of futures contract is 50. (3 marks)
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