You have $500 000 invested in a property index,which has a current value of 4000.00.If a put option is available with an exercise price of 3800,standard deviation of returns is 20%,time to maturity is 6 months and risk free rate is 8% p.a. ,how many contracts are required for an exact hedge of this index? Assume an index point value of $10.00.

A) 13
B) 3
C) 40
D) 50

Question

You have $500 000 invested in a property index,which has a current value of 4000.00.If a put option is available with an exercise price of 3800,standard deviation of returns is 20%,time to maturity is 6 months and risk free rate is 8% p.a. ,how many contracts are required for an exact hedge of this index? Assume an index point value of $10.00.

A) 13
B) 3
C) 40
D) 50

Quizplus · Accepted Answer

The current put option hedge value is 3800 F1F1F1S1F1F1F10 10 = $38000.Therefore,there are $500000/$38000 = 13.158 or 13 contracts required to hedge the index.The other information is not required to answer the question.

You Have $500 000 Invested in a Property Index,which Has