describe a risk-free strategy and delta-hedging position, Risk Management

Assignment Help:

Explain how you would hedge a short position in a European (plain vanilla) call with six  weeks to maturity if the spot price is 60, the strike is 65 and σ = 0.3, r=0.1. You rehedge every week. Assume that the stock will follow the following path for the end-of-week prices: 63, 59, 64, 68, 64, 67. Explain how your hedging position changes every week and what trades you should put in to do so. Assume there are no transaction costs. What is the hedging cost?


 2. The following prices are observed in the market for an option: (all options are on the same underlying with same maturity time)

• Stock trades at S0 = 100 

• A straddle with K=100 trades at 7.9 

• A strip with K=100 trades at 12.1 

• A strap with K=100 trades at 11.6 

• A strangle with K1=95 and K2=105 trades at 5.0 

• A butterfly spread with K1=95, K=100 and K2=105 trades at 2.1


a) Describe a risk-free strategy to make money in this market (only trading the above instruments)

3. A European asset-or-nothing option that expired at time T pays its holder the asset value S(T) at time T is S(T) > K and pays 0 otherwise. Determine the no-arbitrage cost of such an option as a function of parameters s,T,K,r,σ. Find its Delta.


4. You buy 1000 six months ATM call options on a non-dividend paying asset with spot price 100, following a lognormal proves with volatility 30%. Assume the interest rates are constant at 5%. 

• How much do you pay for the options?

• What Delta-hedging position do you have to take?

• One the next trading day, the asset opens at 98. What is the value of your position (the option and shares position)?

• Had you not Delta-hedged, how much would you have lost due to the decrease in the price of the asset?   


Related Discussions:- describe a risk-free strategy and delta-hedging position

Risk assessment, Scottie is a professional basketball player who plans to p...

Scottie is a professional basketball player who plans to play for three more years.  During the summer, he has been offered two different contracts by his current team.  The first

Self- reflective practitioner and component, In practice, you will often be...

In practice, you will often be asked to report on a given situation, problem, project or even your own performance.  It is neither realistic nor honest nor appropriate for you to c

Risk and Return , In a report not to exceed five double-spaced typewritten ...

In a report not to exceed five double-spaced typewritten pages, analyze the results obtained from the three simulations performed, identify the source of the differences, and selec

What is business risk - non-systematic risk, What is Business Risk - Non-Sy...

What is Business Risk - Non-Systematic Risk Risk of doing business in a particular industry or environment is known as business risk. For instance, as one of the largest steel

Expected return over the benchmark, The Investment Committee is big on acti...

The Investment Committee is big on active management, and believes that there are areas/pockets of inefficiencies in the market. Knowing that you have taken Finance 455 at X-Univer

Risk management and financial institutions, On September 25,2008 a portfoli...

On September 25,2008 a portfolio worth $10 million consisting of investments in four stock indices: DJIA, FTSE 100, CAC 40 and NIKKEI 225. The value of the investment in each index

Differentiate between implied and historical volatility, Question 1: (a...

Question 1: (a) What are the distinct types of assets under which derivatives can be based upon? (b) Give at least 5 risks that justify the existence of derivatives? Endorse

Determination of risk assessment policy, Determination  of risk  assessment...

Determination  of risk  assessment  policy  should  be  included  as  a specific  component  of  risk management Risk assessment policy  sets the guidelines for value judgments

Risk management, Several issues have arisen on the Kauri Café Project. Four...

Several issues have arisen on the Kauri Café Project. Four months have passed since the project started. ABC Co. are complaining about not being paid appropriately you initially th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd