Part 1: Please answer the following question with a minimum of 300 words.
Determine two to three (2-3) methods of using stocks and options to create a risk-free hedge portfolio. Support your answer with examples of these methods being used to create a risk-free hedge portfolio.
Part 2: Please respond and give your opinion on the following with a minimum of 150 words.
A hedge portfolio consisting of a along position in the stock and a long position in the put option on the stock, so as to the riskless and produce a return that equal the risk-free interest rate. Two methods od using stocks and options to create a risk-free hedge portfolio are call and put options. Call options, which give the holder the right to purchase a specified asset at a given price for a given period of time, and put options which give the holder the right to sell an asset at a given price for a given period of time. Hedging is a transaction that lowers a firm's risk of damage due to fluctuating commodity prices, interest rates, and exchange rate (Brigham, 2014). Hedging, whether in your portfolio, your business or anywhere else is about decreasing or transferring risk. It is valid strategies that can help protect your portfolio, home and business from uncertainly. Put prices are higher also lower when the risk-free rate is higher, mostly because a higher risk-free rate reduces the present value of the exercise price, which for a put is a payout to the option holder when the option is exercised.
Part 3: Please respond and give your opinion on the following with a minimum of 150 words.
The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time.
Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. estimates. (Discounted Cash Flow (DCF), 2018) Hedge funds are pools of private investor how buy and sell options of stocks (among other things). Putting money into a hedge funds can reduce the risk for investors.