Question

3.1 Dynamically hedging a short position in a call option:

a. Is guaranteed to save you money

b. Results in a reduced volatility of the gain / loss

c. Is more likely to save you money when the option expires out-of-the-money

3.2 Which statement is correct regarding the delta of a put option?

a. Delta is positive

b. In absolute value, delta < 1

c. Delta doesn’t change with the underlying stock price

d. Delta is higher in absolute value when the put option is out-of-the-money (stock is high)

Answer #1

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3.1

Shorting of call option:

It means that you are selling a call option and receiving a premium. If the call option expires out of money, you have the benefit of the premium received.

Answer: Is more likely to save you money when the option expires out of money.

3.2

Delta of a put option = change in payoff/change in stock value.

= Pu-Pd/(Us-Ds)

Pu & Pd are payoffs at two different stock price Us & Ds respectively.

As for put option, as the stock value increases the payoff
decreases, hence it is mainly negative and

Absolutely less than 1.

Answer: b. absolute value, delta < 1

Suppose that you have taken a short position on a call option.
The strike price if $55, and the option premium / price is $5. When
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*** You must show your work to get credit (you can use
both sides of the page to show your work)

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