Consider the following options on stock X: Option Delta Gamma Vega A 0.5 2.2 1.8 В 0.8 0.6 0.2 -0.40 1.3 0.7 D 0.70 1.8 1.4 A bank is long 1000 units of Option A, short 200 units of Option B, short
Consider the following options on stock X: Option Delta Gamma Vega A 0.5 2.2 1.8 В 0.8 0.6 0.2 -0.40 1.3 0.7 D 0.70 1.8 1.4 A bank is long 1000 units of Option A, short 200 units of Option B, short
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Consider the following options on stock X:
Option
Delta
Gamma
Vega
A
0.5
2.2
1.8
В
0.8
0.6
0.2
C
-0.40
1.3
0.7
D
0.70
1.8
1.4
A bank is long 1000 units of Option A, short 200 units of Option B, short
2000 units of Option C, and short 500 units of Option D.
The following two options are also available in the market:
Option
Delta
Gamma
Vega
E
0.6
1.5
0.8
F
0.1
0.5
0.6
a) Design one strategy that would make the bank's portfolio delta
neutral.
b) Design one strategy that would make the bank's portfolio delta and
gamma neutral. Explain why this strategy provides a better hedge
with respect to changes in the price of stock X than the strategy you
constructed in part (a).
c) Design one strategy that would make the bank's portfolio delta,
gamma, and vega neutral.
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