The hedge ratio of an at-the-money call option on IBM is .4. The hedge ratio of an at-the-money put option is -6. What is the hedge ratio of an at-the-money straddle position on IBM?
Ratio is -0.2
The hedge ratio is the formula to compare the value of the proportion of the position hedged to the value of the entire position.
The hedge ratio of a straddle is the sum of hedge ratio of two options.
Hedge ratio = hedge ratio at call option+ hedge ratio at put option
= 0.4 + (-0.6)
= - 0.2
estion: A member of an investment committee interested in learning more about fixed-income investment procedures recalls that a fixed-income manager recently stated that derivative instruments could be used to control portfolio duration, saying, “A futures like position can be created in a portfolio by using put and call options on Treasury bonds.”
a. Identify the options market exposure or exposures that create a “futures-like
position” similar to being long Treasury-bond futures. Explain why the position you created is similar to being long Treasury-bond futures.
b. Explain in which direction and why the exposure(s) you identified in part (a) would affect portfolio duration.
c. Assume that a pension plan’s investment policy requires the fixed-income manager to hold portfolio duration within a narrow range. Identify and briefly explain circumstances or transactions in which the use of Treasury-bond futures would be helpful in managing a fixed-income portfolio when duration is constrained.
a. Turn to Figure 17.1 and locate the contract on the Standard & Poor’s 500 Index. If the margin requirement is 10% of the futures price times the multiplier of $250, how much must you deposit with your broker to trade the September contract?
b. If the September futures price were to increase to 1,200, what percentage return would you earn on your net investment if you entered the long side of the contract at the price shown in the figure?
c. If the September futures price falls by 1%, what is the percentage gain or loss on your net investment?
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