You are a French investor holding a portfolio of U.S. stocks worth $10 million. You wish to

Question:

You are a French investor holding a of U.S. worth $10 million. You wish to engage in a dynamic hedge of the €:$ exchange risk by buying € calls. On April 1, a June 100 € call is quoted at $0.02 per euro. This gives you the right to buy one euro for $1 in June. The delta of this call is equal to 0.5. The spot is $l/€. The size of an option contract is €125,000.
a. How many € calls should you buy to get a good dynamic hedge?
A few days later, your is still worth $10 million. The dollar, however, has dropped to $l.l/€. The call is now worth $0.11, and its delta is equal to 0.9.
b. What is the result, in euros, of your strategy?
c. Has the hedge resulted in a net gain or loss?
d. What should you do to rebalance your hedge?
Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...