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Essentials Of Investments
Found in: Page 555
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

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

See the step by step solution

Step by Step Solution

Step 1: Definition of the hedge ratio

The hedge ratio is the formula to compare the value of the proportion of the position hedged to the value of the entire position.

Step 2: Calculation of hedge ration

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

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