Suppose that an investor owns one share of stock Y and wants to hedge this position...

 

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Suppose that an investor owns one share of stock Y and wants to hedge this position over the next month with some (possibly fractional) quantity of a put option on the stock. Stock Y is currently trading at $50 and the put option is a 1-month European put with a strike of $50 that is currently trading at $2.80 (a European put option is one which can only be exercised at its maturity, not earlier.) In the context of our discussion in class, the put option is security X with which the investor desires to hedge a position of one share in security Y. The investor has a discrete model of uncertainty for stock Y for the next month with five possible outcomes: Scenario 1 2 3 4 5 Probability 10% 15% 40% 25% 10% (Price of) Stock Y 40 45 50 55 60 Using the minimum variance hedging criterion, what is the optimal quantity of put options the investor has to purchase? Suppose that an investor owns one share of stock Y and wants to hedge this position over the next month with some (possibly fractional) quantity of a put option on the stock. Stock Y is currently trading at $50 and the put option is a 1-month European put with a strike of $50 that is currently trading at $2.80 (a European put option is one which can only be exercised at its maturity, not earlier.) In the context of our discussion in class, the put option is security X with which the investor desires to hedge a position of one share in security Y. The investor has a discrete model of uncertainty for stock Y for the next month with five possible outcomes: Scenario 1 2 3 4 5 Probability 10% 15% 40% 25% 10% (Price of) Stock Y 40 45 50 55 60 Using the minimum variance hedging criterion, what is the optimal quantity of put options the investor has to purchase? Suppose that an investor owns one share of stock Y and wants to hedge this position over the next month with some (possibly fractional) quantity of a put option on the stock. Stock Y is currently trading at $50 and the put option is a 1-month European put with a strike of $50 that is currently trading at $2.80 (a European put option is one which can only be exercised at its maturity, not earlier.) In the context of our discussion in class, the put option is security X with which the investor desires to hedge a position of one share in security Y. The investor has a discrete model of uncertainty for stock Y for the next month with five possible outcomes: Scenario 1 2 3 4 5 Probability 10% 15% 40% 25% 10% (Price of) Stock Y 40 45 50 55 60 Using the minimum variance hedging criterion, what is the optimal quantity of put options the investor has to purchase?

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The minimum variance hedging criterion involves finding the optimal number of put options to minimize the variance risk of the hedged position To dete... View the full answer