Question

A bank's position in options on the dollar-euro exchange rate has a delta of 30,000 and a gamma of -80,000. Explain how these numbers can be interpreted. What position would you take to make the position delta neutral?

Answer 1

ANSWER :

Delta for dollar-euro exchange rate signifies that when the value of dollar-euro exchange rate increades by $0.01, bank's position in options increases by 0.01*30,000 = $300. Similarly gamma is the rate at which delta of the bank's position in options increases or decreases. Gamma of -80,000 signifies that when dollar-euro exchange rate increases by $0.01 delta of bank's position decreases by 80,000*0.01 = $800.

To maintain delta neutral position bank should take short position in 30,000 euros.

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