A portfolio consists of 225 shares of stock and 300 calls on that stock.If the hedge ratio for the call is 0.4,what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A)-$345
B)+$500
C)-$580
D)-$520
E)none of the above

Question

Quizplus · Accepted Answer

The dollar change in the value of the portfolio is calculated as follows: The decline in stock value is 225 shares * $1 = $225. The decline in the value of the calls is 300 calls * 0.4 hedge ratio * $1 = $120. The total decline is $225 + $120 = $345.

A Portfolio Consists of 225 Shares of Stock and 300