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

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?   

Posted Date: 2/14/2013 6:56:52 AM | Location : United States

Related Discussions:- describe a risk-free strategy and delta-hedging position, Assignment Help, Ask Question on describe a risk-free strategy and delta-hedging position, Get Answer, Expert's Help, describe a risk-free strategy and delta-hedging position Discussions

Write discussion on describe a risk-free strategy and delta-hedging position
Your posts are moderated
Related Questions
Determine actions to respond to outcomes of risk strategies How to improve your strategic RM Hubbard , D.W (2009) - Risk management can only be fixed by making the followi

Question: (a) What is the objective of risk management? (b) Define the term risk avoidance. (c) Define and describe the Methodology of process approach in ISO 9000. (d

Question 1: (a) Describe the aspects that should be considered when assessing the fit between a person and his work. (b) Display Screen Equipment (DSE) risk assessment shoul

Define the meaning of Return Return is the amount or rate of produce, profits, proceeds which accrues to an economic agent from an undertaking or investment. It's a reward for

Suppose a farmer is expecting that her crop of grapefruit will be ready for harvest and sale as 150,000 pounds of grapefruit juice in 3 months time. She would like to use futures


Question 1: i) How may risks be managed in the Public Sector? ii) Will e-government be an efficient means of providing financial information? Question 2: i) What a

evaluate the importance of leverage in financial management of a small company

Question 1: (a) Explain what is meant by the term „incident handling? in the context of information security. (b) Describe the main features of an effective incident manag

An insurance company is investigating offering kidnap and ransom insurance. Policies are to be sold to multinational companies to provide cover for certain named employees who are