Question
You own a portfolio currently worth RM 4.5 million and beta = 1.0. You foresee the next 3 months being volatile and wish to avoid
You own a portfolio currently worth RM 4.5 million and beta = 1.0. You foresee the next 3 months being volatile and wish to avoid potential losses. The FBM KLCl is now at 900 points. 3-month 900 calls are at 4.50 points while 900 puts are 3.00 points.
(I) Describe the hedge strategy.
(ii) How many options are needed to fully hedge?
(iii) What is the cost of this insurance?
(v) State the net value of your portfolio if the FBM KLCI is at 750 points at maturity.
(v) Graph the position and describe the risk profile.
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
i In order to avoid potential losses on the position one can enter into a contract of buying put opt...
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Foundations of Finance The Logic and Practice of Financial Management
Authors: Arthur J. Keown, John D. Martin, J. William Petty
8th edition
132994879, 978-0132994873
