Options

ven2909
Posts: 1
Joined: Thu Nov 01, 2012 8:05 pm

Options

Postby ven2909 » Thu Nov 01, 2012 8:06 pm

Can any one explain on how to proceed with the question below?

An American investor holds a portfolio of French stocks. The market value of the portfolio is €10 million, with a beta of 1.35 relative to the CAC index. In November, the spot value of the CAC index is 4,750. The exchange rate is USD 1.25/€ . The dividend yield, euro interest rates, and dollar interest rates are all equal to 4%. Which of the following option strategies would be most appropriate to protect the portfolio against a decline of the euro that week?
March Euro options (all prices in US dollars per € ): Strike - 1.25; Call euro - 0.018 ; Put euro - 0.022;
Choose one answer.
a. Sell puts with a premium of USD 220,000
b. Buy calls with a premium of USD 180,000
c. Buy puts with a premium of USD 220,000
d. Sell calls with a premium of USD 180,000

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swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Options

Postby swarnendupathak » Fri Nov 02, 2012 9:26 am

Hi,
The strategy asked to protect against the decline in the value of the portfolio, hence we need to purchase PUT option to gain from the decline in the value. So the only option is C to buy PUT with a premium of USD 220000.

If i am wrong, please correct me..

Thanks
Swarnendu

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Options

Postby content.pristine » Fri Nov 02, 2012 3:29 pm

Swarnendu,

You are absolutely right.
Since you want to protect it from the euro crashing, and the the Quote is 1.25$/euro, we need to buy puts.

8-)


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