exercise: call option delta hedging

Discussion in 'P1.T3. Financial Markets & Products (30%)' started by fullofquestions, Sep 28, 2009.

  1. fullofquestions

    fullofquestions New Member

    A bank has sold USD 300,000 of call options on 100,000 equities. The equities trade at 50, the option strike price is 49, the maturity is in 3 months, volatility is 20%, and the interest rate is 5%. How does it the bank delta hedge? (round to the nearest thousand share)
    a. Buy 65,000 shares (ANS)
    b. Buy 100,000 shares
    c. Buy 21,000 shares
    d. Sell 100,000 shares

    I am used to the hedge ratio h = corr * stdev spot/stdev future. I see that you definitely would buy to hedge but I cannot arrive at the answer. Any equations or tips appreciated.

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