Determine your current portfolio delta gamma and vega

Assignment Help Risk Management

Reference no: EM13925647

The following table lists three financial instru- ments and their deltas, gammas, and vegas for each $1 million notional principal under the assumption of a long position. (Long in a swap or FRA means to pay fixed and receive floating.)

Assume that you hold a $12 million notional principal long position in the three-year call option, an $8 million notional principal short position in the three-year swap, and an $11 million notional principal long position in the FRA. Each derivative is based on the 90-day LIBOR.

Instrument	Delta	Gamma	Vega
3-year call option with	$40	$1,343	$5.02
exercise rate of 0.12
3-year swap with fixed	$152	-$678	$0
rate of 0.1125
2-year FRA with fixed	$72	-$390	$0
rate of 0.11

a. As described above, you have three instru- ments currently in your portfolio. Determine your current portfolio delta, gamma, and vega. Describe in words the risk prop- erties of your portfolio based on your calculations.

b. Assume that you have to maintain your current position in the call option but are free to increase or decrease your positions in the swap and FRA and you can add a position in a one-year call with a delta of $62, a gamma of $2,680, and a vega of $2.41. Find the combination of notional principals that would make your overall position be delta hedged, gamma hedged, and vega hedged.

Reference no: EM13925647

Questions Cloud

Tress company produces shampoo : Nutri-Tress Company produces shampoo in individual-use bottle for hotels. Each bottle sells for $0.36. The variable costs for each bottle (materials, labor, and overhead) total $0.27.

What amount of interest expense was reported : What amount of total liabilities was reported on the December 31, 2013, balance sheet?

Fores construction company : Fores Construction Company reported a pretax operating loss of $240 million for financial reporting purposes in 2013.

Conflict between the staff audit group and the managers : Bob Byrne's ear was still ringing. Byrne was director of the audit Staff at Zack Electrical Parts. He had just received a phone call from Jim Whitmore, the plant manager. Whitmore was furious. He had just read a report prepared by the Audit Staff ..

Determine your current portfolio delta gamma and vega : Determine your current portfolio delta, gamma, and vega. Describe in words the risk prop- erties of your portfolio based on your calculations.

Effective annual rate for all investments : At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Implications on computing cash flows : What are accrual accounting principles and the implications on computing cash flows.

Continuous manufacturing process : A single product produced by a continuous manufacturing process

What is the amount of interest payable at december : What is the amount of interest payable at December 31, 2013?

User Account

All Pages