Index put options are used to provide protection against the value of the portfolio falling below a certain level. Which of the following is true as the beta of the portfolio increases?
A) The cost of hedging increases
B) The options require a lower strike price
C) The number of options required increases
D) All of the above

Question

Quizplus · Accepted Answer

As the beta of the portfolio increases, the cost of hedging increases because higher beta means higher risk. This would require a lower strike price for the put options to be effective, as the portfolio is more likely to experience significant losses. The number of options required also increases because the portfolio is larger and the potential losses are greater. Therefore, all of the options listed are true as the beta of the portfolio increases.

Index Put Options Are Used to Provide Protection Against the Value