You Would Like to Be Holding a Protective Put Position

question 45

Multiple Choice

You would like to be holding a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co.
-Suppose the desired put options with X = 50 were traded.What would be the hedge ratio for the option?

• A) -1.0
• B) -0.5
• C) 0.5
• D) 1.0

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Definitions:

Union Army

The land force that fought for the Northern states during the American Civil War, opposing the Confederacy and fighting to preserve the Union and end slavery.

Steamer Planter

A Confederate steamship hijacked in 1862 by Robert Smalls, an enslaved African American who then sailed it to freedom and surrendered it to the Union.

Robert Smalls

An African American who escaped slavery to become a Union naval hero and later a US Congressman.

Union Navy

The naval force of the United States during the American Civil War, playing a critical role in blockading the Confederate states.