Compute the initial portfolio delta

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A financial institution has the following portfolio of over-the-counter options on IBM: 

Type

Position

Delta of Option

Gamma of Option

Vega of Option

Call

-1,000

0.5

2.2

1.8

Call

-500

0.8

0.6

0.2

Put

-2,000

-0.4

1.3

0.7

Call

-500

0.7

1.8

1.4

A traded options not in the above portfolio on IBM are available with:

Option - 1: delta = 0.6, gamma = 1.5, and vega = 0.8. 

Option - 2: delta = 0.1, gamma = 0.5, and vega = 0.6

a. Compute the Initial portfolio's delta, gamma, and vega. 

b. Compute the positions in Option - 1, Option - 2, and IBM (the underlying) to make the final portfolio delta, gamma, and vega neutral.

Reference no: EM133110763

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