Suggest an appropriate hedging strategy

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Reference no: EM131841862

In the beginning of November, an investor has a stock portfolio worth $173,000. The content of the portfolio replicates very closely that of KOSPI (Korea Stock Exchange Index). The investor wants to ensure that in the end of this year her stock portfolio is at least worth $161,000. At the same time, she would like to reduce the hedging costs stemming from put transactions and is therefore ready to give up the returns higher than 9% in absolute terms till the expiry of options.

In addition, she would also like to earn return higher than risk-free rate in case that stock prices would rise during the maturity of option contracts. In the beginning of November, KOSPI quote is 1730 and prices for KOSPI options that will expire in the next January are as follows. The contract size for KOSPI index options is 10 which implies that one contract is worth $(10 x strike price). The expiration date is the third Friday of the expiration month.

Strike price Puts Calls

1610 39 170

1640 49 150

1800 126 68

1890 188 40

Suggest an appropriate hedging strategy.

Reference no: EM131841862

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