ACT370 - Final Exam, 2008 Questions 1 and 2 relate to the following ...
ACT370 - Final Exam, 2008 Questions 1 and 2 relate to the following ...
ACT370 - Final Exam, 2008 Questions 1 and 2 relate to the following ...
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12. You are given <strong>the</strong> <strong>following</strong> information regarding European call options on a non-dividendpaying s<strong>to</strong>ck with a current price of 60 <strong>and</strong> a volatility of 5 œÞ%& . The continuouslycompounded risk free rate is 6%.Call Option 1 Call Option 2Strike Price 62 65Time <strong>to</strong> Expiry (years) .25 .5Option Price 4.9101 6.3348Delta .5133 .5007Gamma .0295 .0209A market maker has a long position in one European put option with strike price 62 expiring in.25 years. The market maker wishes <strong>to</strong> construct a Delta-Gamma hedge using shares of s<strong>to</strong>ck <strong>and</strong>put options with strike price 65 expiring in .5 years. How many shares of s<strong>to</strong>ck are needed in <strong>the</strong>hedging portfolio?A) Short at least 1 share B) Short between 0 <strong>and</strong> 1 shares C) No shares neededD) Long between 0 <strong>and</strong> 1 shares E) Long at least one share
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