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Suppose that JPMorgan Chase sells call options on $1.10 million worth of a stock portfolio with beta = 1.45. The option delta is .52. It wishes to hedge out its resultant exposure to a market advance by buying a market-index portfolio. Suppose it uses market index puts to hedge its exposure. Each put option is on 100 units of the index, and the index at current prices represents $1,000 worth of stock.

What is the delta a put option?

Compute the following: Assuming the 1 percent market movement, JP Morgan should (buy/sell) ____ put contracts. Assume a market movement of 1 percent.

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Tod Thiel
Tod ThielLv2
28 Sep 2019

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a. What is meant by the delta of a stock option?

b. You are holding call options on a stock. The stock’s beta is 0.75, and you are concerned that the stock market is about to fall. The stock is currently selling for $5 and you hold 1 million options on the stock (i.e you hold 10,000 contracts for 100 shares each). The option delta is 0.8. How much of the market index portfolio must you buy or sell to hedge your market exposure?

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C. No margin is required, because these are not individual investors.

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B. An exchange-traded (ETF) volatility fund.

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8. An example of purchasing a "real" option is a company's opening of a Shanghai office, in order to have the capacity to pursue business in China.

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10. Imagine an equity-oriented state pension fund (such as the State of Maryland Pension funds). Suppose their equity portfolio is NOT identical to the S&P 500 index. Further, suppose that due to a state budget shortfall, the year's additions to the pension fund are likely to be less than actuarially sound. Thus, the fund is becoming very risk-averse. And it needs to implement this feeling by hedging. CHOOSE THE BEST ANSWER, even though there might be more than one true answer. This is actually a question about hedge ratios. A. If the equity portfolio's beta is close to 0, then they could decide to match the overall exposure, via S&P Index futures contracts, to the fund's value. That is, # of contracts times the contract multiplier times the index would approximately equal the value of the fund.

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