Question 4

(a) What is meant by the delta of a stock option?

(b) Explain the no-arbitrage and risk-neutral valuation approaches to valuing a European option using a one-step binomial tree.

(c) What does gamma measure? Can the gamma of a derivatives portfolio be changed by taking a position in the underlying asset? Explain your answer.

(d) Explain why margin accounts are required when clients write options but not when they buy options.