Answer:
Explanation:
a) dollars’ worth of the market-index portfolio should it purchase to hedge its position
=1.60*0.6* $1.2 million
= $115200
b)
delta of call on portfolio=d(c)/d(portfolio value)=0.6 (d=very small change )
=>delta of call on portfolio=d(c)/d(beta*index value)=0.6
=>d(c)/d(index value)=0.6*beta=0.6*1.60=0.96
delta of call on index=d(c)/d(index value)=0.96
delta of put option on index
=delta of call on index-1
=0.96-1
=-0.04
= - 0.04
The delta of a put option is - 0.04
c)
Number of put contracts*delta of put*100*1000*%chg in value of index=%chg in value of index*829,400
=> Number of put contracts=829,400/(delta of put*100*1000)
=> Number of put contracts=829,400/(0.04*100*1000)
=> Number of put contracts=829,400/40000
=> Number of put contracts=20.735=~21
So JP Morgan should buy 21 put contracts.
