Suppose that a March call option to buy a share for $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised?
Seminar 3
Greek Letters
Suppose that a March call option to buy a share for $50 costs $2.50 and is held until March. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised?
Long call
Q4
The company could enter into a long forward contract to buy 1 million Canadian dollars in six months.
Lock in an exchange rate equal to the current forward exchange rate.
The company could buy a call option giving it the right (but not the obligation) to purchase 1 million Canadian dollars at a certain exchange rate in six months.
Insurance against a strong Canadian dollar in six months + still able to benefit if the Canadian dollar is weak in 6 months
A US company expects to have to pay 1 million Canadian dollars (CAD) in 6 months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.
Q5
Delta hedging:
Suppose your position is long 10 call options (1 call = 100 shares) of MSFT
If the option delta is 0.25, how many shares should you buy or sell to be delta hedged?
You currently have a right to buy 250 shares of MSFT in a future date at today’s price
Option delta: + 0.25
Delta exposure: + 250
Delta hedge: short 250 shares
Q6
If you are long 50 put options on AAPL with an option delta of 0.85, how many shares should you buy or sell to be delta neutral ?
You bought a right to sell 50*(-0.85)*100 = 4250 shares of AAPL in a future date at todays price
Option delta: – 0.85
Delta exposure: – 4250
Delta hedge: long 4 250 shares
Q7
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