You Would Like to Hold a Protective Put Position on the Stock

question 88

Multiple Choice

You would like to hold 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
• B) −0.5
• C) 0.5
• D) 1

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Definitions:

Cost of Goods Sold

The financial outlays directly connected with creating the products a company sells, which entail materials and labor.

Purchases Returns and Allowances

Transactions involving the return of goods to suppliers or receiving discounts due to issues like damaged goods, leading to a reduction in purchase costs.

Merchandise Inventory

The goods a company holds in stock with the intention of selling them as part of its business operations.

Freight-In

Freight-in refers to the shipping cost associated with getting goods delivered from suppliers to the buyer, often included in the inventory cost of purchased goods.