What is the total amount you have to spend on the russell

Assignment Help Financial Management

Reference no: EM131933900

You have decided to buy protective put options to protect the your stock holdings of Global Advisers Company’s (GAC) from a potential price decline over the next three months. You have researched Russell 300 index options and have assembled the following information: Russell 300 is currently at $365, and the premium of an at-the-money 3 month Russell 300 put option is $10.25. The beta of Russell 300 is 0.95; the beta of GAC’s portfolio is 1.05.

1. Suppose there is a $1 drop in GAC’s price. By how many dollars should the price of Russell 300 have dropped in a CAPM universe?

A) 2.2/3.3 B) 0.95/1.05 C) .65/.85 D) None of the above (Ans: $1 drop in GAC implies a $(1/1.05) fall in the market, which implies a $(0.95)*(1/1.05) drop in Russell 300)

2. What is the total amount you have to spend on the Russell 300 at-the-money puts to protect GAC’s portfolio from loss if you have 500 shares of GAC.

A) $500*(0.95/1.05) B) $500*(0.66/0.85) C) $300*(2.2/3.3) D) None of the above

3. You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the- money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-themoney puts and your maximum gain is __________. A) greater; lower B) greater; greater C) lower; greater D) lower; lower

4. The Treasury yields for 1yr and 2yrs are 6% and 6.2% respectively. If the Expectations theory holds, what is the forward rate between 1 and 2 years?

A) 6% B) 6.4% C)7% D) None of the above

Reference no: EM131933900

Questions Cloud

Based on the company projected sales level : In the percent of sales method, a company's asset requirements are based on the company's projected sales level.

How carlos deals with cross-cultural differences : Discuss why Carlos Ghosn is considered a successful cross-cultural leader, and how Carlos deals with cross-cultural differences.

What are portfolio weights of each stock : What are the portfolio weights of each stock?

Equity risk premiums as method of comparison : Describe the significance of US equity risk premiums as a method of comparison with other countries

What is the total amount you have to spend on the russell : What is the total amount you have to spend on the Russell 300 at-the-money puts to protect GAC’s portfolio from loss if you have 500 shares of GAC.

What is its pretax cost of debt and cost of equity : If the company’s cost of equity is 15 percent, what is its pretax cost of debt? what is the cost of equity?

What is the purpose of an administrative agency : What is an administrative agency? What is the purpose of an administrative agency?

Seller of the boat can hedge the above contract : Explain the currency risk you are taking with this contract. Describe (in general) 2 ways the seller of the boat can hedge the above contract

Debt-equity ratio-what is the initial cost of the plant : What is the initial cost of the plant if the company raises all equity externally?

User Account

All Pages