FRM -L1 2011

sl

Active Member
Hi David,

I am bit confused by the answer to this question. I thought I had understood the concept. This is my understanding of the problem. The trader is long 200 call options, so the delta of the position is (long (200*100)*(0.5)=10,000. In order to hedge the option exposure, I would need to short (10,000) shares. Can
you please clarify my doubt?

I have seen similar examples, although in those problems, there was no mention of how many shares each contract controls, but should that make any difference?

The answer is a

A trader in your bank has bought 200 call option contracts each on 100 shares of General Motors with time
to maturity of 60 days at USD 2.10. The delta of the option on one share is 0.50. As a risk manager, what
action must you take on the underlying stock in order to hedge the option exposure and keep it delta
neutral?
a. Buy 10,000 shares of General Motors.
b. Sell 10,000 shares of General Motors.
c. Buy 1,000 shares of General Motors.
d. Sell 1,000 shares of General Motors.

Thanks
Sundeep
 

Suzanne Evans

Well-Known Member

Aleksander Hansen

Well-Known Member
No kidding, I get dizzy just trying to browse through the convexity and duration stuff posted only today as it seems to change every few hours.
Forget cranky, I'd already be throwing the angry [ :mad: ] emoticons around....

Thanks for churning out questions and answers with high efficiency!
 
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