A portfolio consists of 400 shares of stock and 200 calls on that stock.If the hedge ratio for the call is 0.6,what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?
A) +$700
B) +$500
C) -$580
D) -$520
E) none of these

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. For the shares, a $1 decline in stock price results in a $400 decline (400 shares x $1). For the calls, the hedge ratio of 0.6 means each call loses $0.60 for a $1 decline in stock price, resulting in a $120 decline (200 calls x $0.60). The total change is -$400 - $120 = -$520.

A Portfolio Consists of 400 Shares of Stock and 200