RSM435H1 Lecture Notes - Lecture 10: Stock Market Index, Risk-Free Interest Rate, Dividend Yield
Document Summary
Lecture 10: options on stock indices, currencies, and. Consider portfolio with beta=1. 0, same dividend yield as index. Can protect against possibility of index falling below k if we buy one put option contract with strike k for every 100s0 dollars in portfolio. If portfolio value is ,000, protect against value dropping below ,000 by buying 5 put options with strike 900, if current index value is 1000. Can still use to hedge if portfolio beta 1. 0. Beta put options must be purchased for each 100s0 dollars in portfolio. If beta=2, have to purchase 10 rather than 5 options as in previous example. Must use capm to find appropriate strike price. Find expected return from change in index and dividend yield, required return from capm, and expected increase in portfolio value given capm return less dividends. Increase in portfolio value = risk free rate + portfolio excess return - dividend yield.
