Baran

 

2、Which of the following is FALSE?

The delta of forwards and futures is 1.

Gamma is largest when options are at-the-money.

Two problems using stop-loss trading on naked options are transaction costs and stock price uncertainty.

For a delta-neutral portfolio, although opposite in sign, theta can serve as a proxy for gamma.

A) II only.

B) I and III only.

C) II and IV only.

D) I only.

Baran

 

 The correct answer is D

 

The delta of forwards is one. The delta of futures is not usually one. Two problems using stop-loss trading on naked options are transaction costs and stock-price certainty. Gamma is largest when options are at-the-money. For a delta-neutral portfolio, although opposite in sign, theta can serve as a proxy for gamma.

Baran

 

The correct answer is A

 

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.

Baran

 

5、To create a delta-neutral portfolio, an investor who has written 5,000 call options that have deltas equal to 0.5 will be:

A) short 2,500 shares in the underlying.

B) long 2,500 shares in the underlying and short 2,500 more options.

C) long 2,500 shares in the underlying.

D) short 2,500 shares in the underlying and be short 2,500 more options.

Baran

 

The correct answer is C

 

If the investor has written 5,000 call options, he then must go long 0.5 × 5,000 = 2,500 shares to create a delta neutral position since the delta of a share is 1.

Baran

 

3、Which of the following is the best interpretation of delta for an option? Delta is the change in the option price for:

A) an instantaneous change in interest rates.

B) an instantaneous change in price of the underlying stock.

C) a change in the time until expiration of the option.

D) an instantaneous change in the volatility of the underlying stock.

Baran

 

The correct answer is B

 

Delta is the slope of the price function of the call option payoff diagram.

Baran

 

4、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 more shares of the stock. 

B) sell some the shares of the stock.

C) buy T-bills.

D) short T-bills.

Baran

 

Franklin computes the rate of change in the European put option delta value, given a $1 increase in the underlying equity. Using the information in Exhibits 1 and 2, which of the following is the closest to Franklin's answer?

A) -0.3264.

B) 0.6736.

C) 0.0180.

D) 36.0527.

Baran

 

The correct answer is C

The correct value 0.0180 is referred to as the put option's Gamma.

The incorrect value -0.3264 is the delta of the put option.

The incorrect value 0.6736 is the call option's delta.

The incorrect value 36.0527 is the put option's Vega.