Concept explainers
(A)
Adequate Information:
The
To calculate:
The fraction of the portfolio, fraction in equity and the stock portfolio if falls by 3%.
Introduction:
Portfolio involves financial asset grouping viz. currencies, commodities, bonds, stocks and cash equivalents. It also comprises of fund counterparts such as closed funds, exchange traded funds and mutual funds. Non-publicly tradable securities such as private, art and real estate investment are also part of portfolios.
Explanation of Solution
Fractions of portfolio invested in T-bills and equity can be calculated based on the Black-Scholes
model. The value of
to T-bills and equity can be known for value of
Formula for
Substitute values to calculate
Calculate the Black-Scholes hedge ratio
"NORMSDIST" function are as follows:
- First, go to the Menu bar of Excel and select 'Formulas' option
- Select Insert Function '(fx)
- Then select a category as Financial
- Then select "NORMSDIST" and click OK
- Then the Function Argument window will open. Now, input the given data in the required field
- Click OK
- The formula will display the final answer as 0.7422
Therefore,
Calculate the put delte as follows:
Hence, place 25.785 of the portfolio in T-bills and 74.22%
Hence, place 25.785 of the portfolio in T-bills and 74.22%
(B)
Adequate information:
To calculate:
Fractions of portfolio divided into bills and equity If stock prices fall by 3% on the first day of trading. It means
Introduction:
Portfolio involves financial asset grouping viz. currencies, commodities, bonds, stocks and cash equivalents. It also comprises of fund counterparts such as closed funds, exchange traded funds and mutual funds. Non-publicly tradable securities such as private, art and real estate investment are also part of portfolios.
Explanation of Solution
Fractions of portfolio invested in T-bills and equity can be calculated based on the Black-Scoles model. The value of
Substitute values to calculate
Calculate the Black-Scholes hedge ratio
Hence,
Calculate the put delta as follows:
Hence, place 27.79% of the portfolio in T-bills and 72.21%
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Chapter 21 Solutions
INVESTMENTS(LL)W/CONNECT
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