Question 2 (7 marks)

A bank's position in options on the dollar-euro exchange rate has a delta of 30,000 and a gamma of 80,000. Explain how these numbers can be interpreted. The exchange rate is 0.9 Eur / USD.

What position would you take to make the position delta neutral? (2 marks)

After a short period of time, the exchange rate moves to 0.93 Eur / USD. Estimate the new delta. (1 mark)

What additional trade is necessary to keep the position delta neutral? (2 marks)

Assuming the bank did set-up a delta neutral position originally, has it gained or lost money from the exchange-rate movement? (2 marks)