The answer to this question just blows my mind. Maybe I lack reading comprehension ability somehow. I’m not going to retype the entire problem, but the synopsis is that the fund is long a drug stock whose approval by the FDA is questionable. They want to hedge it. They suggest buying puts on the stock. The question asks how many options would you need to hedge 100,000 shares? But the answer indicates to sell out of the money calls on the stock (struck at $46 on a $38 stock) instead of buying puts at the money ($38 strike puts). It just struck me as a totally retarded way to hedge a position based on this vignette (though obviously plausible in the real world). Why the hell are they selling calls? any idea? thx in advance
The question asks the number of option contract x that would have to be implemented to hedge the strategy… All you need to know is the ammount of underlying shares and the delta of the option…you are answering a question that isn’t being asked! maybe you sell the call to take in the premium in the real world…not neccessarily optimal though?
Yeah, I got screwed on that question for not reading properly too. They specifically ask how to hedge with the out of the money calls.
Thx. I re-read it and understand why it is wrong. They didn’t specify calls or puts. They just said, “which options would you sell?” And by definition, that requires you to sell calls to hedge a long stock bet (not sell puts). The wording choice on this problem and dozens of others in the EOC is so fucking stupid; I wish these CFA Institute people would get a clue. I can always count on CFA Institute to craft wording and questions that make basic concepts as difficult to properly answer as possible. I wish this entire exam was done inside a series of Excel models, that would be closer to the real world finance.
This is an good example of the CFA question,once you study and understand the concept, you often look beyond the question they ask…hard to work out what is expected of us sometimes?
perdition Wrote: ------------------------------------------------------- > This is an good example of the CFA > question,once you study and understand the > concept, you often look beyond the question they > ask…hard to work out what is expected of us > sometimes? lol. I’ve been on the floor of the CBOE and traded options. I’ve been using options or option valuation in long/short equity and preferred equity investment portfolios for 10+ years including at 3 different hedge funds. This question is stupid language choice and nothing more than that. It’s an exercise in reading comprehension, not actual financial theory or application.