Portfolio A consists of 400 shares of stock and 400 calls on that stock. Portfolio B consists of 500 shares of stock. The call delta is 0.5. Which portfolio has a higher dollar exposure to a change in stock price?
A) Portfolio B
B) Portfolio A
C) The two portfolios have the same exposure.
D) Portfolio A if the stock price increases and portfolio B if it decreases
E) Portfolio B if the stock price increases and portfolio A if it decreases

Question

Quizplus · Accepted Answer

Portfolio B has a higher dollar exposure to a change in stock price because it has 500 shares of stock, while Portfolio A has only 400 shares of stock. The call delta of 0.5 means that each call option is equivalent to 0.5 shares of stock, so Portfolio A has an effective exposure of 400 + (400 * 0.5) = 600 shares of stock. However, Portfolio B has an exposure of 500 shares of stock, which is higher than Portfolio A's exposure.

Portfolio a Consists of 400 Shares of Stock and 400