A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price?
A) +$700
B) −$850
C) −$580
D) −$520

Question

Quizplus · Accepted Answer

The dollar change in the value of the portfolio is calculated by considering the change in value of both the shares and the calls. With 800 shares, a $1 decline results in a $800 loss. The hedge ratio of 0.5 for the 100 calls means each call loses $0.50, totaling a $50 loss for the calls. The total change is -$800 - $50 = -$850.

A Portfolio Consists of 800 Shares of Stock and 100