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LOS d: Explain why and how a dealer delta hedges an option portfolio, why the portfolio delta changes, and how the dealer adjusts the position to maintain the hedge. ffice ffice" />
Q1. 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) buy more shares of the stock.
C) sell some the shares of the stock.
Correct answer is B)
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.
Q2. A manager would delta hedge a position to:
A) earn extra “dividend” income on a given position.
B) earn the risk-free rate.
C) place a floor on the position while leaving the potential for upside risk.
Correct answer is B)
A delta hedged position should earn the risk-free rate. The position does not earn a “dividend” although it should increase in value gradually (at the risk-free rate). The upside potential is limited to the risk-free rate. The manager would have to constantly monitor and adjust the position to achieve the goal.
Q3. A short position in naked calls on an asset can be delta hedged by:
A) shorting the underlying asset.
B) buying the put.
C) buying the underlying asset.
Correct answer is C)
Delta hedging a naked call can be accomplished by owning the underlying asset in an amount that will make the value of the short-call/long-asset portfolio immune to changes in the price of the underlying asset.
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发表于 2009-4-10 10:57
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