1.A delta neutral portfolio has a gamma of -3000 and a vega of -5000. Available in the

market, there is option A with a delta of 0.4, gamma of 0.3 and vega of 2.5. Also available

in the market is option B, with gamma of 0.5, delta 0.6 and vega of 3. How do you make

this portfolio both gamma and vega neutral?

2.A firm has invested in a bond portfolio valued at Sh. 10 million with a modified duration

of 5. An interest rate swap with a duration of 3 is available in the market. Determine the

hedging strategy if the firm wants to reduce the portfolio duration to 2.