Determine whether position in option should be long-short

Assignment Help Financial Management

Reference no: EM132014984

Assume that you wish to form a delta-neutral position by using two options. At the current level of the underlying stock’s price, Option A has a delta of -0.43 and Option B has a delta of 0.33.

a. If you wish to write 800 Option As, determine how many Option Bs should be traded. Also, determine whether the position in Option B should be long or short.

b. Suppose you estimate that if the price of the underlying stock increases by TL1, the delta of Option A becomes -0.42 and the delta of Option B becomes 0.334. In light of this information, estimate the position gamma for the delta-neutral position you formed in part (a).

c. If the underlying stock’s price indeed increases by TL1 and you want to reestablish the delta-neutral position using the underlying stock, determine the number of stocks you would need and the position you would need to take.

Reference no: EM132014984

Questions Cloud

Describe seperately how adding option to portfolio : Describe SEPERATELY how adding an option to a portfolio may increase the the existing risk of the portfolio or may decrease the existing risk of the portfolio.

Particular way of organizing data : In Java, a data structure is a particular way of organizing data so that it can be used efficiently. An array is a Java data structure.

Collecting evidence in a private-sector : Are there any differences between collecting evidence in a private-sector incident and a law enforcement crime scene? Explained it

Develop a list of the software needed to restore operations : Establish a sample hardware asset list for this company and classify those assets as tier 1,2 or 3 assests.

Determine whether position in option should be long-short : Determine how many Option Bs should be traded. Also, determine whether the position in Option B should be long or short.

Implementing a maximization algorithm : Is it appropriate to use rounding while implementing a maximization algorithm or it leads in false results?

What will be the outcome of the child : The natural cause of a disorder is unknown because biological and environmental factors can contribute to these orders.

List the steps required to install the oracle : List the steps required to install the Oracle, SQL Server, and MySQL relational database management systems (RDBMSs) and the problems

What is cost of capital for the project : What is the cost of capital for the project? Does the accept-reject decision using IRR agree with the decision using NPV?

User Account

All Pages