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    Delta Hedging Questions

    Uploaded by

    Claudia Choi
    The document contains 7 questions about option Greeks and hedging techniques: 1) Find the delta of European call options and how to delta hedge the position. 2) Calculate delta hedge ratios using stock and exchange traded calls. 3) Calculate delta, gamma, and theta of a 4-month put option. 4) Use Black-Scholes to price a call option and estimate the impact of a small change in stock price. 5) Calculate the number of calls needed to make a two-asset portfolio gamma neutral. 6) Use portfolio insurance to protect a stock position from falling below a strike price. 7) Explain that an option theta of -0

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    © All Rights Reserved
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    Delta Hedging Questions

    Uploaded by

    Claudia Choi
    88 views3 pages
    The document contains 7 questions about option Greeks and hedging techniques: 1) Find the delta of European call options and how to delta hedge the position. 2) Calculate delta hedge ratios using stock and exchange traded calls. 3) Calculate delta, gamma, and theta of a 4-month put option. 4) Use Black-Scholes to price a call option and estimate the impact of a small change in stock price. 5) Calculate the number of calls needed to make a two-asset portfolio gamma neutral. 6) Use portfolio insurance to protect a stock position from falling below a strike price. 7) Explain that an option theta of -0

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    Delta hedging questions

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    The document contains 7 questions about option Greeks and hedging techniques: 1) Find the delta of European call options and how to delta hedge the position. 2) Calculate delta hedge ratios using stock and exchange traded calls. 3) Calculate delta, gamma, and theta of a 4-month put option. 4) Use Black-Scholes to price a call option and estimate the impact of a small change in stock price. 5) Calculate the number of calls needed to make a two-asset portfolio gamma neutral. 6) Use portfolio insurance to protect a stock position from falling below a strike price. 7) Explain that an option theta of -0

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    88 views3 pages

    Delta Hedging Questions

    Uploaded by

    Claudia Choi
    The document contains 7 questions about option Greeks and hedging techniques: 1) Find the delta of European call options and how to delta hedge the position. 2) Calculate delta hedge ratios using stock and exchange traded calls. 3) Calculate delta, gamma, and theta of a 4-month put option. 4) Use Black-Scholes to price a call option and estimate the impact of a small change in stock price. 5) Calculate the number of calls needed to make a two-asset portfolio gamma neutral. 6) Use portfolio insurance to protect a stock position from falling below a strike price. 7) Explain that an option theta of -0

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Derivatives

    Tutorial: The Greeks

    Question 1

    An investor has written 100 European call options (K = $20, T = 1) on non-dividend paying

    Carlton Ltd. shares. The current share price is $15, the volatility of Carlton shares is 20% per

    annum, and the risk-free rate is 10% per annum. Each option entitles the holder to buy one

    Carlton share. Find the delta of each option and explain how the investor could delta hedge

    his exposure.

    Question 2

    A financial institution has the following portfolio of over the counter options on XYZ

    Corporation shares:

    Option Type Position and Number Delta


    Call Long 1000 0.25
    Call Short 300 0.85
    Put Long 400 -0.40

    The current XYZ stock price is $30. An exchange traded call option with a delta of 0.6

    currently sells for $6. Each option covers one XYZ share.

    a) How could the investor delta hedge her exposure using the stock?

    b) How could the investor delta hedge her exposure using the exchange traded call?

    Question 3

    Consider a 4 month put option on a stock index. The current value of the index is 305 points,

    the strike price is 300 points, the dividend yield is 3% per annum, the risk-free rate is 8% per

    annum and the volatility of the index is 25% per annum. Assume a Black-Scholes-Merton

    world.
    a) Find the delta, gamma, and theta of the option

    b) Discuss your results in part (a).

    N.B Theta calculation is an extension and is not examinable. The relevant formula can be located
    on page 386 in the 8th edition.

    Question 4

    Consider a European call option on a non dividend paying stock when the stock price is

    $10.00, the strike price is $12.00, the risk-free interest rate is 6% per annum, the volatility is

    40% per annum, and there is 2 years to maturity? (Use the Black-Scholes-Merton model).

    a) What is the current price of the option?

    Now assume the stock price instantaneously changes to $10.10.

    b) Use the delta of the option to estimate the value of the option after the change

    c) Use the delta and gamma of the option to estimate the value of the option after the

    change.

    d) What is the exact value of the option after the change?

    e) Comment on your results.

    Question 5

    Consider a portfolio consisting of n1 units of security1 (value V1, delta δ1, gamma Γ1) and

    n2 units of security2 (value V2, delta δ2, gamma Γ2) where both securities are affected by

    the same source of uncertainty being the price of an underlying stock. A traded call option on

    the underlying stock has a delta δ3 and a gamma of Γ3.

    a) What position in the call option is necessary to make the portfolio gamma neutral?

    Hint: The gamma for the two asset portfolio is

    b) What position in the stock is necessary to make the revised portfolio delta neutral?
    Question 6

    Suppose the current price of (non dividend paying) ABC Limited shares is $20 and in 3

    months time it will be either $22 or $18. Assume the risk free interest rate is 12% per annum

    and markets are frictionless. Assume you have a portfolio of 10,000 ABC shares and you

    want to use portfolio insurance to protect the value of the portfolio from falling below $21

    per share in 3 months time.

    Hint: rather than buying long puts with a strike of $21, you are required to create a long put
    synthetically. This can be done using the one period binomial model.

    a) What steps should be undertaken now to protect the portfolio?

    b) Show the cash-flows now and in 3 months time on the insured portfolio.

    c) Hull suggests the following (slightly) different strategy – invest only the proceeds from

    the sale of the stock in riskless bonds i.e. . Repeat part (b) under Hull's strategy

    d) Comment on your results in parts (b) and (c).

    Question 7

    What does it mean to assert that the theta of an option position is -0.1 when time is measured

    in years? If a trader feels that neither a stock price nor its implied volatility will change, what

    type of option position is appropriate?

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