Asked by Lizbeth Longoria on Jul 12, 2024
Verified
Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?
A) Portfolio B
B) Portfolio A
C) The two portfolios have the same exposure.
D) Portfolio A if the stock price increases and portfolio B if it decreases
E) Portfolio B if the stock price increases and portfolio A if it decreases
Call Delta
Measures the sensitivity of an option's price to a change in the price of the underlying asset, reflecting how much the price of the option is expected to change for a small change in the asset price.
Portfolio A
A collection of financial investments like stocks, bonds, and cash equivalents held by an institution or a private individual.
Portfolio B
This could refer to a specific investment portfolio identified by the letter "B," often as part of a series or classification of portfolios managed by an investment firm or individual.
- Acquire an understanding of mitigating risk in options trading and perform calculations to determine hedge ratios.
Verified Answer
AR
Amanda RowenJul 16, 2024
Final Answer :
A
Explanation :
Portfolio B has a higher dollar exposure to a change in stock price. Portfolio A's exposure is calculated as the sum of the delta-adjusted exposure of the calls (300 calls * 0.7 = 210 equivalent shares) and the 150 shares, totaling 360 equivalent shares. Portfolio B, with 575 shares, has a higher exposure to stock price changes.
Learning Objectives
- Acquire an understanding of mitigating risk in options trading and perform calculations to determine hedge ratios.