How much money would the trader lose

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Reference no: EM131697029

Question: Consider the following quote: Implied U.S. dollar/New Zealand dollar volatility fell to 10.1%/11.1% on Tuesday. Traders bought at-the-money options at the beginning of the week, ahead of the Federal Reserve interest-rate cut. They anticipated a rate cut which would increase short-term volatility. They wanted to be long gamma. Trades were typically for one-week maturities, in average notionals of USD1020 million. (Based on an article in Derivatives Week (now part of Global Capital)).

a. Explain why traders wanted to be long gamma when the volatility was expected to increase.

b. Show your argument using numerical values for Greeks and the data given in the reading.

c. How much money would the trader lose under these circumstances? Calculate approximately, using the data supplied in the reading. Assume that the position was originally for USD30 million.

Reference no: EM131697029

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