Final answer:
Option c) write 5 call options and long 2.778 shares of stock is an example of a perfectly hedged portfolio, as it aligns with the given hedge ratio of 0.5556, representing a 1:1 hedge. Option C is correct.
Step-by-step explanation:
The question pertains to the concept of hedging using derivatives, in particular, call options. The hedge ratio, also known as the delta, represents the amount of shares needed to offset the price movement of 1 option. In this case, a hedge ratio of 0.5556 means you would need 0.5556 shares to hedge one call option.
Given this hedge ratio, the perfectly hedged portfolio would involve creating a position where the number of shares and the number of options are balanced according to this ratio.
Among the provided options, a perfectly hedged portfolio would involve either buying or writing call options and holding a specific number of shares that is equivalent to the number of call options times the hedge ratio. Option c) suggests writing 5 call options and going long on 2.778 shares of stock.
When we multiply 5 (call options) by 0.5556 (hedge ratio), we get exactly 2.778. Consequently, option c) provides an example of a perfectly hedged portfolio as the number of call options and the shares are in exact proportion to the hedge ratio.