Question: Repeat the previous problem, except that instead of hedging volatility risk, you wish to hedge interest rate risk, i.e., to rho-hedge. In addition to delta-,

Repeat the previous problem, except that instead of hedging volatility risk, you wish to hedge interest rate risk, i.e., to rho-hedge. In addition to delta-, gamma-, and rhohedging, can you delta-gamma-rho-vega hedge?
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You have purchased a 40-strike call with 91 days to expiration. You wish to deltahedge, but you are also concerned about changes in volatility; thus, you want to vega-hedge your position as well.
a. Compute and graph the 1-day holding period profit if you delta- and vegahedge this position using the stock and a 40-strike call with 180 days to expiration.
b. Compute and graph the 1-day holding period profit if you delta-, gamma-, and vega-hedge this position using the stock, a 40-strike call with 180 days to expiration, and a 45-strike put with 365 days to expiration.

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We purchased a 91day 40strike call denoted option 1 a Using a 180day 40strike call option 2 to deltarho hedge we must write 5064 of these options and ... View full answer

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