Suppose that a fund manager has a portfolio of stocks currently worth (in total) £100,000 and that on the market there are a call and a put option contracts available on the same assets of the portfolio at the price of £100 each option, with 3 months to expiration, a strike price of £100 and a premium of £1.60 for the call and £1.40 for the put. 

 Explain how the fund manager can hedge her position (with the call or put options) against the risk of a decline in her portfolio's value and show a table with the portfolio value, the payoff and profit of the option, and the total profit of the hedging strategy should the value of the underlying be 60, 100, or 140 at the expiration date. 

Answer rating: 100% (QA)

ANSWER To hedge against the risk of a decline in the portfolios value the fund manager can use put options Put options provide the holder the right to ... View the full answer