A hedge ratio of 0.85 implies that a hedged portfolio should consist of
A)long 0.85 calls for each short stock.
B)short 0.85 calls for each long stock.
C)long 0.85 shares for each short call.
D)long 0.85 shares for each long call.
E)None of the options

Question

Quizplus · Accepted Answer

The hedge ratio is the slope of the option value as a function of the stock value.A slope of 0.85 means that as the stock increases in value by $1, the option increases by approximately $0.85.Thus, for every call written, 0.85 shares of stock would be needed to hedge the investor's portfolio.

A Hedge Ratio of 0