Question

A trader has the following portfolio, where options contracts are for one share. 1. Long 1-year put with strike $80 2. Long 1-year call with strike $120

Assume that the price of the underlying asset is $100. Volatility is 20%, rate=1%, dividend yield 0%. a. Calculate the value of the portfolio. b. What will be the value if the stock drops 25% in 1 month? c. What will be the value if the stock drops 25% and the volatility goes up to 45 % in a month? d. What will be the new value of the portfolio Delta in scenario c.?

Answer 1

A portfolio is a grouping of financial asset such as stocks, bonds,commodities,currencies,and cash equalents as well as their fund counterparts,including mutualexchange-traded and closed funds.

a.Stock has the expected return of 20% and makes up 0% of portfolio.

Then expected rate of portfolio=0+20%=20%

b Stock has expected return20% and makes up 25%

Then expected rate of portfolio=(-.25)+20%=(-5%)

c Stock has the expected return of 45% and makes up 25%

Then expected rate of port folio=(-.25)+45%=20%

d New value of portfolio delta in scenario

20%+(-5%)+20%=35%