a)

1. Define the delta, gamma and theta of an option.
2. Describe, using a numerical example, the concept of delta hedging.

b)

Give definitions of the Greeks that could be used as an aid to management in each of the following situations. State also the desired ranges for their numerical values and define any notation you use.

(i) A hedge fund manager wishes to establish a delta-neutral position that would not need frequent rebalancing for part of his portfolio.

(ii) A derivatives trader is concerned that a change in the distribution of the daily price movements of particular shares might affect the values of the options he holds on those shares.

(iii) The trustee of a pension fund that purchased a large number of options last year as a means of hedging is concerned about changes in the value of the fund as the options approach their expiry date