Suppose that a trader has bought two shares AB and CD. In particular, she has x (£000s) shares of AB and double the amount of shares of CD. The share's AB current bid and offer are £115.5 and £115.6 respectively while the share's CD current bid and offer are £95 and £98 respectively. I. a) Which of the two shares (AB and CD) is more liquid. Explain b) Calculate (in terms of x) the cost of liquidation in a normal market
Suppose that a trader has bought two shares AB and CD. In particular, she has x (£000s) shares of AB and double the amount of shares of CD. The share's AB current bid and offer are £115.5 and £115.6 respectively while the share's CD current bid and offer are £95 and £98 respectively. I. a) Which of the two shares (AB and CD) is more liquid. Explain b) Calculate (in terms of x) the cost of liquidation in a normal market
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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Transcribed Image Text:QUESTION 2 (
Suppose that a trader has bought two shares AB and CD. In particular, she has x
(£000s) shares of AB and double the amount of shares of CD. The share's AB current
bid and offer are £115.5 and £115.6 respectively while the share's CD current bid and
offer are £95 and £98 respectively.
I.
a) Which of the two shares (AB and CD) is more liquid. Explain
b) Calculate (in terms of x) the cost of liquidation in a normal market
II.
Consider a bank's portfolio of options on GBP (£):
Position
Delta
Gamma
Vega
Option 1
Option 2
Option 3
-1050
-2,000
0.8
2.4
1.6
-0.4
1.2
0.9
800
0.5
1.6
1.4
a) Calculate the Delta (A), Gamma (r) and Vega (V) of the portfolio
b) Explain how the Portfolio's Delta, Gamma and Vega can be interpreted
Assume a fourth traded option (option 4) is available. Option's 4 Delta (A), Gamma
(r) and Vega (V) are given in the following table:
Delta
Gamma
Vega
Option 4
2.5
0.5
Identify a position in the traded option 4 and in GBP to make the portfolio both
gamma and delta neutral
d) Identify a position in the traded option 4 and in GBP to make the portfolio both vega
and delta neutral
[s.,
e) Assume another option (option 5) that can be traded, is available. Option's 5 Delta
(A), Gamma (r) and Vega (V) are given in the following table:
Delta
Gamma
Vega
Option 5
0.9
0.3
1.2
Identify a position to make the portfolio delta, gamma and vega neutral
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