Question
You work in a Bank as the head of the Derivatives desk and your responsibility is to open the derivatives portfolio from scratch (the bank
You work in a Bank as the head of the Derivatives desk and your responsibility is to open the derivatives portfolio from scratch (the bank does not have any open operations). The first day of operations arrives and a client operates the following with the bank:
Purchase Call, Notional 100K usd, Strike ATMF, term 90 days
Put Sale, Notional 100k usd, Strike ATMF, term 90 days
Forward sale 90 days
At the time of closing the trades, the market was trading as follows:
Spot 20.00 usd/mxn
MXN rate 90 days continuous cap 6.50%
Rate USD 90 days continuous cap 2.00%
3Month Volatility 11%
Calculate the following:
Portfolio delta? Explain with detail the amount of the underlying asset that you would be long or short to cover the risk of movements in the dollar peso.
Calculate the Profit and loss (PnL) of the portfolio if the volatility goes to 21%. Do you win or lose money?
Note: Assume positions are from the bank's point of view
Note 2: The notional amount of the forward is 100 thousand dollars
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