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# Hedging Portfolios using derivatives

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Suppose you are a financial advisor to an investor whose portfolio consists of 400 shares of Delta Cruise Inc. stock and 10 put options on the same stock. The risk free rate is 6%, time to maturity is six months, exercise price and stock price are both at \$82, and the market observed put price is \$4.56. The stock does not pay out any dividend. After your analysis of the Delta Cruise Inc. stock prices, you find out that the standard deviation is at 30%. Is the investor position well hedged? What is your advice to the investor?

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Suppose you are a financial advisor to an investor whose portfolio consists of 400 shares of Delta Cruise Inc. stock and 10 put options on the same stock. The risk free rate is 6%, time to maturity is six months, exercise price and stock price are both at \$82, and the market observed put price is \$4.56. The stock does not pay out any dividend. After your analysis of the Delta Cruise Inc. stock prices, you find out that the standard deviation is at 30%. Is the investor position well hedged? What is your advice to the investor?

For a European put option on a non-dividend paying stock, delta is given by N(d1)-1

Using the Black Scholes Pricing Formula
d1= {ln (S/X) + ( r + ½ s2 ) x (T-t)}/ (s x square root of (T-t))

Inputs

Stock Price= S= \$82.00
Exercise price = X= \$82.00 ...

#### Solution Summary

Determines whether the investor position well hedged.

\$2.19