5. A financial institution has the following portfolio of over-the-counter derivatives onpounds sterling:ТуреPositionDelta ofGamma ofVega ofOption/Forward Option/Forward Option/ForwardCall-1,0000.52.21.8Put-2,000-0.41.30.7Call-5000.71.81.4Forward1,000-1A traded option is available with a delta of 0.6, a gamma of 1.5, and a Vega of 0.8. Estimate what happens to the value of the delta and gamma neutral portfolio when there is ashock to the foreign exchange market causing pounds sterling drop by 5% and its volatilityincrease from 11% to 12%. Note that Vega is in the unit of per %. You can ignore the elapsedtime in this case (At = 0).

The financial institution has a portfolio of over-the-counter derivatives on pounds sterling which…

Estimate what happens to the value of the delta and gamma neutral portfolio when there is a shock to the foreign exchange market causing pounds sterling drop by 5% and its volatility increase from 11% to 12%. Note that Vega is in the unit of per %. You can ignore the elapsed time in this case (At = 0).

Estimate what happens to the value of the delta and gamma neutral portfolio when there is a shock to the foreign exchange market causing pounds sterling drop by 5% and its volatility increase from 11% to 12%. Note that Vega is in the unit of per %. You can ignore the elapsed time in this case (At = 0).

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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