Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. equity markets did indeed fall, but BIC's portfolio performance was disappointing. lagging its peer group by nearly 10%. Washington is reviewing the options strategy to determine why the hedged portfolio did not perform as expected BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of 0.69. How many call options should be written to make BIC's overall position delta-neutral? Should the calls be purchased or written? Number of call options The calls should be written

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. equity markets did indeed fall, but BIC's portfolio performance was disappointing. lagging its peer group by nearly 10%. Washington is reviewing the options strategy to determine why the hedged portfolio did not perform as expected BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of 0.69. How many call options should be written to make BIC's overall position delta-neutral? Should the calls be purchased or written? Number of call options The calls should be written

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 1MC

See similar textbooks

Similar questions

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. 13. BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of 0.69. What is the number of call options necessary to create a delta-neutral hedge? 14. Return to the previous problem. Will the number of call options written for a delta-neutral hedge increase or decrease if the stock price falls? 15. Which of the following…
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. Washington considers a put option that has a delta of −.65. If the price of the underlying asset decreases by $6, then what is the best estimate of the change in option price?
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the underlying stock price. Using this diagram, indicate how delta is interpreted. Delta is the:a. Slope in the option price diagram.b. Curvature of the option price graph.c. Level in the option price diagram.
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. 10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is hedged against: a. Small price changes in the underlying asset. b. Small price decreases in the underlying asset. c. All price changes in the underlying asset. 11. After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the…
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is perfectly hedged against:a. Small price changes in the underlying asset.b. Small price decreases in the underlying asset.c. All price changes in the underlying asset.
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rд = 3.2%. The rate of return on Bpex was only r = 2.6%. The market today responded to very encouraging news about the unemployment rate, and = 3%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as: Apex: A = 0.5% + 1.6rM Bpex: r = -0.1% +0.4rM a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.) Apex Bpex Predicted Returns % % b. Which company do you think won the lawsuit? Apex O Bpex
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA = 3.1%. The rate of return on Bpex was only r3 = 2.5%. The market today responded to very encouraging news about the unemployment rate, and = 3%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as: Apex: ra Вpex: r B = -0.1% + 0.8rM a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.) Apex Bpex = 0.5% + 1.1rM Predicted Returns % % b. Which company do you think won the lawsuit? Apex O Bpex
You are a financial advisor and one of your customers tells you that, according to her, Company A is a successful Norwegian firm listed in the OSEAX index and undervalued in the market. She estimates that it has a CAPM alpha of 3% and a CAPM beta of 1.25. The risk-free rate is 1%. Due to her macroeconomic predictions, your client expects a decline in the Norwegian stock market index OSEAX, and she would like to still invest 20 million NOK in stock A while, at the same time, not being exposed to the market. You are asked to suggest and implement a trading strategy that achieves this goal. The OSEAX index currently sits at 1,250 points, and the multiplier for its futures contracts on the Norwegian stock exchange is 500 NOK. a. Without doing any computation, what level of average return can your client expect to receive if she implements your suggested strategy? Why? b. Without doing any computation, will your client be able to hedge all risks with this strategy? C. Perform this…
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA = 3.1%. The rate of return on Bpex was only rB = 2.5%. The market today responded to very encouraging news about the unemployment rate, and rM = 3%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as:Apex: rA = .2% + 1.4rM Bpex: rB = −.1% + .6rMOn the basis of these data, which company do you think won the lawsuit?
You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Don’t worry about specific values when constructing the graph—merely illustrate how things look with “reasonable” data.
4) XYZ has a beta of 1.5. The annualized market return yesterday was 14%, and the risk-free rate is currently 1%. You observe that XYZ had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that A) bad news about Matthews was announced yesterday. B) good news about Matthews was announced yesterday. C) no news about Matthews was announced yesterday. D) interest rates rose yesterday. E) interest rates fell yesterday. Please justify your answer.