An investor holds long position of 500 shares of MSFT and would like to use a...

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An investor holds long position of 500 shares of MSFT and would like to use a put option to hedge the downside risk. Given the following two options: a) Which option is more cost efficient? b) What is the optimal amount of contracts to fully hedge the downside risk? c) Given everything else equal, as the stock price moves down by $20, what should be the profits from the put options? Spot price: 585.21 Put Put Strike price 590 530 option premium 36.10 14.15 Delta -0.49 -0.24 An investor holds long position of 500 shares of MSFT and would like to use a put option to hedge the downside risk. Given the following two options: a) Which option is more cost efficient? b) What is the optimal amount of contracts to fully hedge the downside risk? c) Given everything else equal, as the stock price moves down by $20, what should be the profits from the put options? Spot price: 585.21 Put Put Strike price 590 530 option premium 36.10 14.15 Delta -0.49 -0.24

Answer rating: 100% (QA)

SOLUTION a To determine which option is more cost efficient we can compare their prices relative to their deltas The delta of an option represents the ... View the full answer