.

A call opon on a stock has a

delta of 0.3. A trader has sold
1,000 opons. What posion
should
the trader take to hedge the
posion?
A. Sell 300 shares
B. Buy 300 shares
C. Sell 700 shares
D. Buy 700 share
. A call opon on a stock has a
delta of 0.3. A trader has sold
1,000 opons. What posion
should
the trader take to hedge the
posion?
A. Sell 300 shares
B. Buy 300 shares
C. Sell 700 shares
D. Buy 700 share
Hull: Opons, Futures, and Other
Derivaves, Ninth Edion
Chapter 19: The Greek Le ers
Mulple Choice Test Bank:
Quesons with Answers
1. A call opon on a stock has a
delta of 0.3. A trader has sold
1,000 opons. What posion
should
the trader take to hedge the
posion?
A. Sell 300 shares
B. Buy 300 shares
C. Sell 700 shares
D. Buy 700 share
INSTITUTE OF BUSINESS MANAGEMENT
Assessment # 1 – Summer 2020
Course Title: Risk Financing Techniques Course Code: FRM404
Faculty: Madiha Ashraf Section:
Day / Date: 18th July 2020
Student’s Name Total Marks : 15
Student ID:

Note: Please attempt all the questions

(2.5 marks)
1. A call option on a stock has a delta of 0.3. A trader has sold 1,000 options. What position should
the trader take to hedge the position?
A. Sell 300 shares
B. Buy 300 shares
C. Sell 700 shares
D. Buy 700 shares

2. What does theta measure?

A. The rate of change of delta with
the asset price
B. The rate of change of the
por+olio value with the passage of
me
C. The sensivity of a por+olio
value to interest rate changes
D. None of the above
6. 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
D. The gamma of a European put
equals the gamma of a European
call
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
D. The gamma of a European put equals the gamma of a European call

3. Maintaining a delta-neutral portfolio is an example of which of the following

A. Stop-loss strategy
B. Dynamic hedging
C. Hedge and forget strategy
D. Static hedging

4. Which of the following could NOT be a delta-neutral portfolio?

A. A long positon in call options plus a short position in the underlying stock
B. A short position in call options plus a short positon in the underlying stock
C. A long 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. A highly positive or highly negative value of gamma indicates that a portfolio needs frequent
rebalancing to stay delta neutral
B. The magnitude of gamma is a measure of the curvature of the portfolio value as a function
of the underlying asset price
C. A 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

Q1. Define gamma to an investor who has taken a position in an option. Also discuss the risks with
an investor where the gamma of a position is large and negative and the delta is zero?
(2 marks)

Q2. A bank’s position in options on the dollar–euro exchange rate has a delta of 30,000 and a gamma
of −80,000. (3.5 marks)
a) Explain how these numbers can be interpreted.
b) The exchange rate (dollars per euro) is 0.90. What position would you take to make the
position delta neutral?
c) 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?
d) Assuming the bank did set up a delta-neutral position originally, has it gained or lost money
from the exchange-rate movement?

Q3. The gamma and vega of a delta-neutral portfolio are 50 and 25, respectively, where
the vega is “per %.” Estimate what happens to the value of the portfolio when there is a shock to the
market causing the underlying asset price to decrease by $3 and its volatility to increase by 4%.
(3 marks)

Q4. A financial institution has the following portfolio of over-the-counter options on pounds sterling:
(4 marks)

Type Position Delta of Option Gamma of Option Vega of Option

Call -1000 0.50 2.2 1.8
Call -500 0.80 0.6 0.2
Put -2000 -0.40 1.3 0.7
Call -500 0.70 1.8 1.4

A traded option is available with a delta of 0.6, a gamma of 1.5, and a vega of 0.8.
(a) What position in the traded option and in pounds sterling would make the portfolio both gamma
neutral and delta neutral?
(b) What position in the traded option and in pounds sterling would make the portfolio both vega
neutral and delta neutral?