INSTITUTE OF BUSINESS MANAGEMENT Assessmers # 1 - Summer 2020 Course Code: Fraoa Course Title: Risk Financing Techniques Section: Faculty: Madiha Ashraf Day/Date: 18" July 2020 Student's Name Student ID: Total Marks: 15 Note: Please attempt all the questions (2.5 marks) 1. Acall option on a stock has a delta of 0.3. A trader has sold 1,CUU options. What position should the trader take to hedge the position? A Sell 300 shares, Buy 300 shares C. Sell 700 shares D. Buy 700 shares 2. Which of the following is true? A. The delta of a European put equals minus the delta of a European call, B. The delta of a European put equals the delta of a European call C. The gamma of a European put equals minus the gamma of a European call _2-The gamma of a European put equals the gamma of a Evropean call 3. Maintaining a delta-neutral portfolio is an example of which of the following A. Stop-loss strategy Beoynamic hedging C. Hedge and forget strategy D. Static hedging, 4. Which of the following could NOT be a delta-neutral portfolio? ‘A. Along positon in call options plus a short position in the underlying stock \ 8A short position in call options plus a short positon in the underlying stock C. Along position in put options and a long position in the underlying stock D. A long position in a put option and a long position in a call option 5. Which of the following is NOT true about gamma? A. Ahighly positive or highly negative value of gamma indicates that a portfolio needs frequent rebalancing to stay delta neutral B The magnitude of gamma isa measure ol the curvature o! the portfolio value as a function of she underlying asset price big positive value for gamma indicates that a big movement in the asset price in either direction will lead to a loss D. A long positon in either a call or a put has a positive gamma1. Define gamma to an investor who has talen a position in an option. Also discuss the risks with an investor where the gamma of a position 1: large and negative and the delta is zero? r Tn timpte words, an oplon’s armas on of aplicats dalle caeniie si poy Plinth l At, focuoge é efsend 3 ne Padi powd Movewren ce , A ao eo i plone ue he the dfs i: Dee QM ineesloy oll At a huge arrow pipiens monet in te ashe Price inerficle +t incteake ove 0 ank’s position in options on the dollar-euro exchange rate has a delta of 30,000 anda gamma of ~80,090 (3.5 marks) a) Explain how these numbers can be interpreted. bb). The exchange rate (dollars per euro) is 0.90. What position would you take to make the position delta neutral? ¢) After a short period of time, the exchange rate moves to 0.93.Estimate the new delta. What additional trade is necessary to keep the position delta neutral? 4) Assuming the bank did set up a delta-neutral position originally, ha: from the exchange-rate movement? a) R col inler? one f deat | vm SCHOO, ve ee bees ar Fd jue by fd He whe cine popes will ey ) wile te ech Lage tbe Iiouecl i bo! Oe Pipe’ dela foll 1 * aki) 000 2 Bad ie moke dia ne Sol , ol orl icecl -lg dat | \ 201000 Ewloe ¢ (2 marks) sit gained or lost money we in ob tha = er ache, < som a lemtop 035] « 24 40,00 - 2489 = 27600 ia) A. wen dese dif we ae Dh (o qdame he bot “will Lore dle - yode Paes ae )3. The gamma and vega of a delta-neutral portfolio he vega is “per %.” Estimate what happens to the val the market causing the underlying as Be incieese ty fi value = 05 bs xB ae cg x Qe = $325 exhuw Q4. A financial institution has the followin are 50 and 25, respectively, where ue of the portfolio when there is a shock to ‘case by $3 and its volatility to increase by 4%, (3 marks) hpi’ gree belo set price to decr f+ Yea 29 x) 8 Portfolig/of over-the-counter options on pounds sterling: (4 marks) INypaieteeiteae| se araskion | Delta of Option mma of Option | Vega of Option aa [Gal ____|-1000 __ [050 22 fig et Call ___ [500 0.80 06 Jo2 | Put -2000 [040 a3 [07 ] Cale aea ees -500 | 1070 fag _ [14 J A traded option is available with a del. (2) What position in the traded optio neutral and delta neutral? {b) What position in the traded o; neutral and delta neutral? Te deltas Se posits i Pree el 86 - Staph pe we protic 8 Ob es x 13. a of Cs, a gamma of 1.5, and a vega of 0.8, "and in pounds sterling would make the portfolio both gamma tion and in pounds sterling would make the portfolio both Vega 38 ye ae bes 5oox 0 10> 450 le bellow as eo sear ee . e eya aye posite i gies below ar: ~tdeee Q- 505. Kor YL xG@ 7-500 K1-4= -4,000 . A Aon ti ‘Sy ene: fons on (peg fect [slis ree position has qe J Gee0 X16 2 G060 Le. whole. ae iy theme Oy o4() “Gs 60 (io sion has 4 v oe: wl ies pediot= 6 ye xob a a’ ep s 2 Lion as “un $1090 Kodedl “apa domyeteee of = “Pees cm teen ‘5 anes hella nents ve a neste Jatt ty Files + ‘ opbars will ai Kew 6 shock barition. «51008 = post hele bs bot, ey