A portfolio consists of 400 shares of stock and 200 calls on that stock.If the hedge ratio for the call is 0.6,what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A)+$700
B)+$500
C)-$580
D)-$520
E)none of the above

Question

Quizplus · Accepted Answer

The hedge ratio of 0.6 means each call option changes by $0.60 for every $1 change in the stock price. With 200 calls, the total change from the calls is 200 * 0.6 = $120. The 400 shares will decrease by $400 for a $1 decline in stock price. The net change in the portfolio value is -$400 + $120 = -$280. Therefore, the correct answer is -$520, which is option D.

A Portfolio Consists of 400 Shares of Stock and 200