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Portfolio of options on us dollar-euro exchange rate

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Using relevant algebra, explain what the risks for option writers facing a large position gamma while their portfolio is delta hedged?

A hedge fund owns a portfolio of options on the US dollar-euro exchange rate. The delta of the portfolio is 65. The current exchange rate is 1.100. Derive an approximate linear relationship between the change in the portfolio value and the percentage change in the exchange rate. The daily volatility of the exchange rate is 0.6%. Assuming the normal distribution of the exchange rate returns, estimate the 30-day 99% VaR of the portfolio.

Reference no: EM132528063

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