You Have Determined That You Need -1,589 Call Options to Hedge

question 57

Multiple Choice

You have determined that you need -1,589 call options to hedge your stock portfolio.What should you do based on this information?

• A) buy 16 call option contracts
• B) buy 1,589 call option contracts
• C) write 16 call option contracts
• D) write 160 call option contracts
• E) write 1,589 call option contracts

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Definitions:

Substitution Effect

The change in consumption patterns due to a change in the relative price of goods, leading consumers to substitute away from higher-priced goods toward lower-priced ones.

Income Effect

How an adjustment in income levels for individuals or the economy affects the demand for goods or services.

Engel Curve

A graphic representation showing how a consumer's demand for a good varies with income, keeping other factors constant.

Strictly Convex Preferences

Preferences where consumers always prefer mixtures of goods to extremes, demonstrating a consistent desire for variety.