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Delta Hedge

This document outlines the process of dynamic delta hedging for an institution that sold call options on stock. It shows the stock price, delta, shares purchased or sold each week, and the cumulative costs over 20 weeks to maintain a delta neutral hedge. The final present value of hedging costs is close to the Black-Scholes option price.

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shiva19892006
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44 views3 pages

Delta Hedge

This document outlines the process of dynamic delta hedging for an institution that sold call options on stock. It shows the stock price, delta, shares purchased or sold each week, and the cumulative costs over 20 weeks to maintain a delta neutral hedge. The final present value of hedging costs is close to the Black-Scholes option price.

Uploaded by

shiva19892006
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Dynamic delta hedging

An institution has sold call option on 100,000 shares of a non-dividend paying stock
Current sha
49
Exercise pr
50
Risk-free r
0.05
SD of stoc
20%
Time to ma
20
Time to mat 0.384615
d1
0.054181
d2
-0.069853
N(d1)
0.521605
N(d2)
0.472155
Option pric
2.40
Option val
240053
Week
Share P Time to
Delta
Shares
Cost of
Cum cost
maturity
Purchased purchases with intt
Interest cost
0
49 0.384615
0.522
52160 2555863 2555863
2458
1
48.12 0.365385
0.458
-6359 -306019 2252301
2166
2
47.37 0.346154
0.400
-5798 -274665 1979802
1904
3
50.25 0.326923
0.596
19626 986182.3 2967888
2854
4
51.75 0.307692
0.693
9667 500267.5 3471009
3338
5
53.12 0.288462
0.774
8087 429574.1 3903921
3754
6
53 0.269231
0.771
-253 -13416.39 3894258
3744
7
51.87
0.25
0.706
-6514 -337870 3560132
3423
8
51.38 0.230769
0.674
-3196 -164219 3399336
3269
9
53 0.211538
0.787
11234 595385.1 3997990
3844
10
49.88 0.192308
0.550
-23636 -1178951 2822883
2714
11
48.5 0.173077
0.413
-13741 -666460 2159137
2076
12
49.88 0.153846
0.542
12971 647005.7 2808219
2700
13
50.37 0.134615
0.591
4806 242055.1 3052974
2936
14
52.13 0.115385
0.768
17768 926271.6 3982181
3829
15
51.88 0.096154
0.759
-902 -46793.2 3939217
3788
16
52.87 0.076923
0.865
10585 559652.7 4502657
4329
17
54.87 0.057692
0.978
11321 621162.3 5128149
4931
18
54.62 0.038462
0.990
1163 63525.34 5196605
4997
19
55.87 0.019231
1.000
1010 56404.68 5258007
5056
20
57.25
0
1.000
0
0 5263063
Thus the cost of hedgi
The present value of h

263063
258172 which is close to the Black-scholes option price of 240,000

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