Question
Assume that for a portfolio the following Greek Letters have been calculated: Delta = 0, Gamma = -2500 and Vega = -4000. A risk manager
Assume that for a portfolio the following “Greek Letters” have been calculated:
Delta = 0, Gamma = -2500 and Vega = -4000. A risk manager would like to make the portfolio Gamma and Vega neutral using the following two options:
| Option | Delta | Gamma | Vega |
| A | 0.6 | 0.5 | 2.0 |
| B | 0.5 | 0.8 | 2.2 |
What are the quantities wA of Option A and wB of Option B that need to be added to the portfolio to make it Gamma and Vega neutral? What is then the new Delta of the portfolio?
Step by Step Solution
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Step: 1
To make the portfolio Gamma and Vega neutral we need to add two options to the portfolio in such ...
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Risk Management and Financial Institutions
Authors: Hull John
4th edition
1118955943, 978-1118955949
