Suppose that ABC Finance sells call options on $ 1 25 million worth of a stock portfolio with beta 5 1 5 The option delta is 8 It wishes to hedge out its resultant exposure to a market advance by buying a market index portfolio a How many dollars worth of the market index portfolio should it buy b What if ABC instead uses market index puts to hedge its exposure Should it buy or sell puts Each put option is on 100 units of the index, and the index at current prices represents $ 1,000 worth of stock

Question: Suppose that ABC Finance sells call options on $ 1.25 million worth of a stock portfolio with beta 5 1.5. The option delta is .8.

Suppose that ABC Finance sells call options on $ 1.25 million worth of a stock with beta 5 1.5. The option delta is .8. It wishes to hedge out its resultant exposure to a market advance by buying a market index
a. How many dollars’ worth of the market index should it buy?
b. What if ABC instead uses market index puts to hedge its exposure? Should it buy or sell puts? Each put option is on 100 units of the index, and the index at current prices represents $ 1,000 worth of stock.

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