You would like to be holding a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co.
-Suppose the desired put options with X = 50 were traded.What would be the hedge ratio for the option?
A) -1.0
B) -0.5
C) 0.5
D) 1.0

Question

Quizplus · Accepted Answer

The hedge ratio (delta) for a protective put is calculated as the change in the option price divided by the change in the stock price. Since the stock can either increase or decrease by 10%, the hedge ratio is -0.5, indicating that for every share of stock, you need half a put option to hedge.

You Would Like to Be Holding a Protective Put Position