Assume that the current 6-month futures price of coffee is 23 SEK per kilo with an annual volatility of 42%. If the annual risk-free rate of interest is 3.25%, calculate the delta of a short position in 500 European call options on 6-month coffee futures. In your calculations assume that the option strike price is 22 SEK and that the option contracts all mature in 5 months. 

If you wish to delta hedge this option position, calculate the size of the initial hedge position using:

(i) Spot contracts, (ii) 6-month coffee futures and (iii) 9-month coffee futures.

In general, what effect would an explicit consideration of storage costs have on your calculations?

Answer rating: 100% (QA)

To calculate the delta of a short position in 500 European call options on 6month coffee futures we need to use the BlackScholes option pricing model ... View the full answer