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FinanceQ&A LibraryMark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?Question

Asked Mar 10, 2020

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Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S.

equity markets did indeed experience a downturn of approximately 4% over a 12-month period.

However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%.

Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.

BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at $3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?

Step 1

The strategy of hedging where the position of a portfolio of various options is created such that the value of the portfoli...

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