Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. (delta-hedge / no rebalancing) suppose a stock pri

(Delta-Hedge / No Rebalancing) Suppose a stock price is $50, a call option has a...

60.1K

Verified Solution

Question

Finance

(Delta-Hedge / No Rebalancing) Suppose a stock price is $50, a call option has a strike price of $50 and the calls market price is $4. A dealer sells 10 call option contracts (for 1000 option-shares). The original Delta is .55

(a) What does our basic hedging logic say is the Dealers real risk and what should be generally done.

(b) To start a Delta Hedge, what should the dealer do NOW, and what should it cost ? (Hint-550 shares).

(c) After (b), if there is an immediate $0.50 rise in the stock price, what is the exact delta expected change in the dealers value of her long shares + written calls, and the combined overall change.

(d) Assume the dealer hedges as indicated in (b and c), BUT, the ACTUAL change in the option price is $0.30, to $4.30, not to the $4.275 you should have computed in (c). What is the exact ACTUAL change in the dealers value of her long shares + written calls, and the combined overall change.

(e) Again assume (b, not c), but the stock price rises by $5.00 to $55. The Non-ReBalanced delta hedge has a problem. Explain with logic and perhaps graph illustration what might happen due to the Gamma problem. An exact combined overall change is not needed.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students