Question
It is hedging time! screams the Managing Director at the equity derivatives desk of a big investment bank where you work. A wealthy client has
It is hedging time! screams the Managing Director at the equity derivatives desk of a big investment bank where you work. A wealthy client has just bought a 6-month European call on Tesla, Inc (ticker: TSLA) with strike price (K) $600 because the client believes Tesla will go to the moon very soon. Your bank is, obviously, on the other side of the trade. Your job is to set up a gamma-neutral hedge. Market information you need to help you is below. To work effectively, you are strongly advised to use the DerivaGem.xls software or your own Excel spreadsheet to calculate all the relevant parameters (it is, however, still possible to answer this question without using DerivaGem.xls). Today is 1 December 2020. Current TSLA stock price is $600. TSLA does not pay dividends because it uses the money to invest in amazing technology. The continuously compounded risk-free rate is 1%. The implied volatility of TSLA is always equal to the VIX index + 2% (i.e., if the VIX is equal to 10% TSLA implied volatility is 12%). You need to find out what the VIX was on 1 Dec 2020 (to do that, you can use https://fred.stlouisfed.org/series/VIXCLS and download VIX data in Excel format). If you are out of time, assume that VIX was 10%. There is a European TSLA call traded on the Chicago Board Options Exchange (CBOE) with strike price 610 and maturity of 12 months. The implied volatility for TSLA is the same for all options. Describe the steps necessary to execute the gamma-neutral hedge. Report all the relevant portfolio weights and parameters
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