You want to delta-gamma hedge your position

Assignment Help Financial Management

Reference no: EM132044241

Vulcan Gravitational Fracking (VGF) stock sells for $77 a share. The annual interest rate is 8%, and the annual standard deviation on VGF stock is 20%. The time to expiration of all options is 9 months. You are short 1000 put options on TASF with a strike price of 75. To hedge you position, you can buy or sell VGF stock, or another put options on VGF at the money (i.e. with a strike price of 77).

Given all this:

A: Derive the position you will take if you want to delta hedge your position.

B: Derive the position you will take if you want to delta-gamma hedge your position.

C: Given your answers in A and B, graph (on the same graph) the net gain or loss in your positions if the price of VGF jumps to X, X a number between 1 and 100. (So you’ll want two lines on your graph, one with the return to delta hedging and one with the return to delta-gamma hedging.)

Reference no: EM132044241

Questions Cloud

Compute carlson weighted average cost of capital : The standard deviation of returns on Carlson company’s common stock is 37%, Compute Carlson’s weighted average cost of capital (WACC).

Component cost of debt for use in wacc calculation : If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

What annual interest rate would you effectively pay : What annual interest rate would you effectively pay if you took the deal?

What is the fair market value of share of tlp stock : If TLP has no other assets, and a discount rate of 13% per year is appropriate, what is the fair market value of a share of TLP stock?

You want to delta-gamma hedge your position : Derive the position you will take if you want to delta hedge your position. Derive the position you will take if you want to delta-gamma hedge your position.

Compute the apr for each mortgage option : Compute the APR for each mortgage option and the incremental cost of borrowing the additional amount if option 2 is selected.

Arbitrage strategy and how much money you expect to make : explain your arbitrage strategy and how much money you expect to make.

What nominal discount rate is appropriate for this project : The inflation rate is forecast to be 4% per year. What nominal discount rate is appropriate for this project?

What is the beta coefficient for asset : Asset M is in fact the “market” portfolio. What is the Beta coefficient for Asset M? For Asset A? For Portfolio P?

User Account

All Pages