25 May Question 1) A call option on a stock has a delta of 0.3. A trader has sold 1,000 options. What position should the trader take to hedge the position?
Question
1) A call option on a stock has a delta of 0.3. A trader has sold 1,000 options. What position should the trader take to hedge the position?
A) Sell 300 shares
B) Buy 300 shares
C) Sell 700 shares
D) Buy 700 shares
2) What does theta measure?
A) The rate of change of delta with the asset price
B) The rate of change of the portfolio value with the passage of time
C) The sensitivity of a portfolio value to interest rate changes
D) None of the above
3) What does gamma measure?
A) The rate of change of delta with the asset price
B) The rate of change of the portfolio value with the passage of time
C) The sensitivity of a portfolio value to interest rate changes
D) None of the above
4) What does vega measure?
A) The rate of change of delta with the asset price
B) The rate of change of the portfolio value with the passage of time
C) The sensitivity of a portfolio value to interest rate changes
D) None of the above
5) What does rho measure?
A) The rate of change of delta with the asset price
B) The rate of change of the portfolio value with the passage of time
C) The sensitivity of a portfolio value to interest rate changes
D) None of the above
6) Which of the following is true?
A) The delta of a European put equals minus the delta of a European call
B) The delta of a European put equals the delta of a European call
C) The gamma of a European put equals minus the gamma of a European call
D) The gamma of a European put equals the gamma of a European call
7) A portfolio of derivatives on a stock has a delta of 2400 and a gamma of -10. An option on the stock with a delta of 0.5 and a gamma of 0.04 can be traded. What position in the option is necessary to make the portfolio gamma neutral?
A) Long position in 250 options
B) Short position in 250 options
C) Long position in 20 options
D) Short position in 20 options
8) A trader uses a stop-loss strategy to hedge a short position in a three-month call option with a strike price of 0.7000 on an exchange rate. The current exchange rate is 0.6950 and value of the option is 0.1. The trader covers the option when the exchange rate reaches 0.7005 and uncovers (i.e., assumes a naked position) if the exchange rate falls to 0.6995. Which of the following is NOT true?
A) The exchange rate trading might cost nothing so that the trader gains 0.1 for each option sold
B) The exchange rate trading might cost considerably more than 0.1 for each option sold so that the trader loses money
C) The present value of the gain or loss from the exchange rate trading should be about 0.1 on average for each option sold
D) The hedge works reasonably well
9) Maintaining a delta-neutral portfolio is an example of which of the following?
A) Stop-loss strategy
B) Dynamic hedging
C) Hedge and forget strategy
D) Static hedging
10) Which of the following could NOT be a delta-neutral portfolio?
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