Suppose a trader sells a call option on 500,000 with a delta of 0.35 and buys another
Question:
Suppose a trader sells a call option on £500,000 with a delta of 0.35 and buys another call option on £1,000,000 with different parameters whose delta is 0.55. What is his net exposure to small movements in the exchange rate? How could he cover this position?
Step by Step Answer:
If a trader sells a call option on 500000 with a delta o...View the full answer
International Financial Management
ISBN: 978-1107111820
3rd edition
Authors: Geert Bekaert, Robert Hodrick
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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