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Question 4: (7 marks) When a portfolio is delta neutral and has a negative gamma, a loss is experienced when there is a large movement
Question 4: (7 marks) When a portfolio is delta neutral and has a negative gamma, a loss is experienced when there is a large movement in the underlying asset price. Please circle the correct answer for each of the following questions based on the graph below (1 mark each), and then explain the statement based on your short answers (3 marks). d f b oc St (1) There are two curves on the graph, X-axis represents the underlying value S, Y-axis represents the option portfolio value P,. What represents the delta of the portfolio? A. Slope of the curve B. Curvature of the curve C. Width of the curve D. Opening direction of the curve (up or down) (2) The gamma indicates the ratio of the amount that the portfolio delta changes to the amount that underlying changes. Then, what represents the Gamma of the portfolio? A. Slope of the curve B. Curvature of the curve C. Width of the curve D. Opening direction of the curve (up or down) (3) Which graph (the left one or the right one) represents a negative Gamma? A. Left B. Right (4) Which points indicate or which point indicates a delta neutral portfolio? A. a and B. bande C. d andf D. b only
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