A hedge ratio of 0.70 implies that a hedged portfolio should consist of
A) long 0.70 calls for each short stock.
B) short 0.70 calls for each long stock.
C) long 0.70 shares for each short call.
D) long 0.70 shares for each long call.
E) none of these.

Question

Quizplus · Accepted Answer

A hedge ratio of 0.70 implies that for every 1 share sold short, the portfolio should purchase 0.70 shares. Therefore, the hedged portfolio should have long 0.70 shares for each short call, which is option C. The other options involve buying or selling call options, which is not consistent with the given hedge ratio.

A Hedge Ratio of 0