Can anyone help me with explaining what is the impact of trading commissions on delta hedging trading decisions for the SAC call position?
otrnan School of Management RIT Case BriefH3 NIVERSITY OF TORONTO Build 1.62 (1 EU Hedging 3 You're currently working on the equity options market making desk at CDZ Bank. Your role is to show markets1 to institutional managers who wish to buy or sell blocks of options for individual equities. When trades are made, you are then responsible for hedging your position and remaining relatively "delta neutral". That is, your book's risk with respect to pric e changes in the underlying stock should be largely neutralized. This morning, you received a call from a hedge fund that wants to purchase 200 1-month at-the- money calls for Syndicated Aluminum Corp (SAC). Your r'rn's proprietary volatility forecasting model suggests that the annualized volatility of the underlying for the next month [20 days) will be approximately 15%. Using the Black-Scholes pricing formula, and the following inputs, you have calculated what you believe is the fair value for the option: Inputs Trading Days to Maturity: 20 [252 trading days per year] Risk Free Interest Rate: 0% Strike Price: $50.00 SAC Stock Price: $50.00 Volatility: 15% Black Scholes Price: $0.84 In order to have a prot margin, you have priced the option using an Implied Volatility 0f 25% which results in a price of $1.412. The hedge fund has decided to go ahead with the trade at $1.41 and the trade will be executed once the markets open. 1 The term "show a market" refers to quoting a bid and an ask to a prospective client. 2 This margin is articially inated for case -illustration purposes. Kevin Mak" and Tom McCurdy** prepared this case for the RH\" market simulation platform, hgp:(grit.rotrnan.utoront0.ca. *Manager of the Financial Research and Trading Lab, Rotrnan School ofManagement; \"Professor ofFinanceand Founding Director of the FRTL, Rotman School of Management, University of Toronto. Copyright 2015, Rotman School of Management No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in an y form or by any means electronic, mechanical, photocopying, recording or otherwise without the permission ofRotman School of Management