You represent a client that holds a large position in the stock of Nucor. Nucor has a dividend yield of 1%, a required return (as calculated by the CAPM) of 12%, and a debt/equity ratio of 1.50. The risk-free rate is 2% and the expected market return is 10%.
They want to reduce some of the investment risk in the Nucor stock by using options. Unfortunately, there are no options available in which Nucor stock is the underlying asset. However, there are many options available in which the underlying asset is the value of the S&P 500. Provide advice to the client about possibly using S&P 500 options to hedge the volatility of the Nucor stock.
