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A pharma stock is forecast to either increase from its current price of $60/share to $72 or to drop to $54/share depending of the FDA

A pharma stock is forecast to either increase from its current price of $60/share to $72 or to drop to $54/share depending of the FDA approval or denial of its new drug. You have 200 shares of such pharma shares, and you want to delta hedge them using at-the-money calls. How many calls should you have transacted?

  • A. Buy 300 calls
  • B. Buy 200 calls
  • C. Sell 300 calls
  • D. Sell 200 calls

A pharma stock is forecast to either increase from its current price of $60/share to $72 or to drop to $54/share depending of the FDA approval or denial of its new drug. You have 200 shares of such pharma shares, and you want to delta hedge them using at-the-money calls. What is the terminal cash flow of the up-state and the down-state if you'd set up the delta hedge correctly?

  • A. $10,800 for both up-state and down-state
  • B. $14,400 for both up-state and down-state
  • C. $10800 for up-state; $14,400 for down-state
  • D. $14,400 for up-state; $10,800 for down-state

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