Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

a) Define the delta, gamma and theta of an option. Describe, using a numerical example, the concept of delta hedging. b) Give definitions of the

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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions