You Would Like to Be Holding a Protective Put Position

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

Correct Answer:

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