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An option dealer is delta hedging a short call position on a stock. As the stock price increases, in order to maintain the hedge, the dealer would most likely have to:
A)
buy T-bills.
B)
sell some the shares of the stock.
C)
buy more shares of the stock.



As the value of the underlying increases, the delta of a call option increases. This means more of the underlying asset is needed to hedge the position.

TOP

In delta-hedging a call position, which of the following pairs of conditions would lead to the gamma effect being the most important? The call is:
A)
at-the-money and has a long time until expiration.
B)
out-of-the-money and near expiration.
C)
at-the-money and near expiration.



Gamma refers to the change in value of the delta given the change in value of the underlying stock. Gamma will be most important when the call option being hedged is either at the money or near expiration.

TOP

In delta-hedging, gamma would be important if the price of the underlying asset:
A)
had a large move upward only.
B)
remained constant.
C)
had a large move upward or downward.



Gamma refers to the change in value of delta given the change in value of the underlying stock. Typically, larger swings in the price of an asset will cause larger changes in delta, thus impacting the delta hedge. This means that the larger the move in the underlying asset in either direction, the more important is the second-order gamma effect.

TOP

All of the following are conditions that make the second-order gamma effect more important to a manager delta-hedging an option EXCEPT when the:
A)
delta is near zero.
B)
option is at-the-money.
C)
option is near expiration.



All of these conditions make the gamma effect more important except the delta being near zero. If the delta is near zero or one then the option delta will move more slowly towards zero or one and cause less of an affect on gamma.

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