Whether the contract is long or short and states the reason with he help of given information. Introduction: Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

Question

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Answer 1

Question

Chapter 23, Problem 7PS

a.

Summary Introduction

To evaluate: Whether the contract is long or short and states the reason with he help of given information.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

b.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

c.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

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You expect the stock market to increase, but instead of acquiring stock, you decide to acquire a stock index futures contract. That index is currently 60.4, and the contract has a value that is $500 times the amount of the index. The margin requirement is $2,500. When you make the contract, how much must you put up? Round your answer to the nearest dollar. $ What is the value of the contract based on the index? Round your answer to the nearest dollar. $ If the value of the index rises 2 percent to 61.608, what is the profit on the investment? Round your answer to the nearest cent. $ What is the percentage earned on the funds you put up? Round your answer to one decimal place. % If the value of the index declines 2 percent to 59.192, what percentage of your funds will you lose? Round your answer to one decimal place. Enter your answer as a positive value. % What is the percentage you earn (or lose) if the index falls to 55.4? Round your answer to one decimal place. Enter…

Suppose the 1-year futures price on a stock-index portfolio is 1,914, the stock index currently is 1,900, the 1-year risk-free interest rate is 3%, and the year-end dividend that will be paid on a $1,900 investment in the market index portfolio is $40.a. By how much is the contract mispriced?b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing.c. Now assume (as is true for small investors) that if you short sell the stocks in the market index, the proceeds of the short sale are kept with the broker, and you do not receive any interest income on the funds. Is there still an arbitrage opportunity (assuming that you don’t already own the shares in the index)? Explain.d. Given the short-sale rules, what is the no-arbitrage band for the stock-futures price relation-ship? That is, given a stock index of 1,900, how high and how low can the futures price be without giving rise to arbitrage opportunities?

Currently you own no stock or options. Today's data for Green Corporation, where the call and put have the same exercise price and expire in one year: Strike Price Put Price Call Price Stock Price $32.50 $2.85 $1.65 $30.00 a. If you construct a protective put strategy, which securities will you buy or sell, and what is your total investment today? If the stock price is $20 on the expiration date, what will be the value of your portfolio (payoff) on that day, and your net profit? b. If you construct a covered call strategy, which securities will you buy or sell, and what is your total investment today? If the stock price is $45 on the expiration date, what will be the value of your portfolio (payoff) on that day, and your net profit?

Answer 2

Question

Chapter 23, Problem 7PS

a.

Summary Introduction

To evaluate: Whether the contract is long or short and states the reason with he help of given information.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

b.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

c.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

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Answer 3

Question

Chapter 23, Problem 7PS

a.

Summary Introduction

To evaluate: Whether the contract is long or short and states the reason with he help of given information.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

b.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

c.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

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Answer 4

Question

Chapter 23, Problem 7PS

a.

Summary Introduction

To evaluate: Whether the contract is long or short and states the reason with he help of given information.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

b.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

c.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

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Answer 5

Chapter 23, Problem 7PS

a.

Summary Introduction

To evaluate: Whether the contract is long or short and states the reason with he help of given information.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

b.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

c.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

Answer 6

Chapter 23, Problem 7PS

a.

Summary Introduction

To evaluate: Whether the contract is long or short and states the reason with he help of given information.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

Answer 7

Chapter 23, Problem 7PS

a.

Summary Introduction

To evaluate: Whether the contract is long or short and states the reason with he help of given information.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

Answer 8

b.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

Answer 9

b.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund. Given that S&P 500 index is 1950 and the contract multiplier is $ 50.

Introduction:

Hedge Ratio: Hedge ratio is also called as ‘delta’. This ratio is used to calculate the number of hedges required to safeguard or protect against the risk of portfolio’s loss while dealing with commodity derivatives. It can be obtained when the option value is divided by the change in stock price. When the ratio is between 1 to 100%, it means that it is a fully hedged position and when the ratio is 0, it means that it not hedged.

Answer 10

c.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

Answer 11

c.

Summary Introduction

To compute: The number of contracts to be made when the equity holdings are invested into a market-index fund and portfolio beta is 0.6.

Introduction:

Beta: Symbolically it is represented as ‘ ß’. When a portfolio has to be compared with the market as a whole, certain calculations such as volatility, systematic risk, etc., are very much required. Beta is one such tool to measure the volatility and systematic risk of the security of the portfolio. A beta of less than one states that the portfolio is less rapidly changed than the market.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 23 - Prob. 1PS Ch. 23 - Prob. 2PS Ch. 23 - Prob. 3PS Ch. 23 - Prob. 4PS Ch. 23 - Prob. 5PS Ch. 23 - Prob. 6PS Ch. 23 - Prob. 7PS Ch. 23 - Prob. 8PS Ch. 23 - Prob. 9PS Ch. 23 - Prob. 10PS

Solution Summary: The author explains that beta measures volatility and systematic risk of a portfolio. Short indexes help fund managers in protecting the price fall of stocks.

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