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1) Portfolio manager in charge of the portfolio worth $8 million is concerned that market might reject rapidly during next six months and would like to utilize options on S&P 100 to give protection against portfolio declining below $7 million. S&P 100 index is presently valued at 400 and each contract is on 100 times the index.

i) If portfolio has a beta of 1, how many put option contracts must be purchased?

ii) If portfolio has a beta of 1, what should the strike price of the put options be?

iii) If portfolio has a beta of 0.5, how many put options must be purchased?

2) A call option on the asset has the delta of 0.3. Trader has sold 3,000 options and wishes to create a delta-neutral position.

i) Should the trader take a long or short position in the asset?

ii) How many units of asset must be bought or sold?

3) Some investor/speculators recognized weaknesses inherent in usage of CDOs during time of Crisis and made profits on order of tens or hundreds of millions of dollars by betting against markets. Briefly describe how they did this. What was the final source of their profits? Must the U.S. government have instituted the “Windfall Profits Tax” on these individuals and utilized the money to repair financial damage caused during the crisis?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914338

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