Describe why sometimes Delta hedging is not sufficient in cancelling a port- folio's risk exposure. (Your...
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Describe why sometimes Delta hedging is not sufficient in cancelling a port- folio's risk exposure. (Your answer cannot be more than 50 words. Answers with more than 50 words will not be graded.) (ii) (5 points) Suppose you predict that the stock prices of firms A and B will be the same, while currently Stock A is much more expensive than B, what kind of trade should you do? What might be the potential risk for your trade? (Your answer cannot be more than 50 words. Answers with more than 30 words will not be graded.) (iii) (5 point) Suppose there are two put options with identical underlying, strike prices and maturities T. One is American and the other is European. If the investor chooses to exercise the American option at t<T, will the investor exercise the corresponding European option for sure? (Your answer cannot be more than 50 words. Answers with more than 30 words will not be graded.) (iv) (5 points) Consider the Theta (9) of a European call option. Is it always negative? Explain why. (Your answer cannot be more than 100 words. Answers with more than 100 words will not be graded.) (v) (5 points) At time t, consider a European call and a European put with the same non- dividend underlying stock S,, maturity T and strike prices K. If the European call has an implied BSM volatility of 20% per annum, while the put's implied volatility of 25%, is there an arbitrage opportunity? If yes, what kind of portfolio should be formed to take advantage of such opportunity? (Your answer cannot be more than 100 words. Answers with more than 100 words will not be graded.) (vi) (5 points) Explain what a box spread is. Why would some investors in US market would prefer to 'borrow' using box spreads? (Your answer cannot be more than 100 words. Answers with more than 100 words will not be graded.) Describe why sometimes Delta hedging is not sufficient in cancelling a port- folio's risk exposure. (Your answer cannot be more than 50 words. Answers with more than 50 words will not be graded.) (ii) (5 points) Suppose you predict that the stock prices of firms A and B will be the same, while currently Stock A is much more expensive than B, what kind of trade should you do? What might be the potential risk for your trade? (Your answer cannot be more than 50 words. Answers with more than 30 words will not be graded.) (iii) (5 point) Suppose there are two put options with identical underlying, strike prices and maturities T. One is American and the other is European. If the investor chooses to exercise the American option at t<T, will the investor exercise the corresponding European option for sure? (Your answer cannot be more than 50 words. Answers with more than 30 words will not be graded.) (iv) (5 points) Consider the Theta (9) of a European call option. Is it always negative? Explain why. (Your answer cannot be more than 100 words. Answers with more than 100 words will not be graded.) (v) (5 points) At time t, consider a European call and a European put with the same non- dividend underlying stock S,, maturity T and strike prices K. If the European call has an implied BSM volatility of 20% per annum, while the put's implied volatility of 25%, is there an arbitrage opportunity? If yes, what kind of portfolio should be formed to take advantage of such opportunity? (Your answer cannot be more than 100 words. Answers with more than 100 words will not be graded.) (vi) (5 points) Explain what a box spread is. Why would some investors in US market would prefer to 'borrow' using box spreads? (Your answer cannot be more than 100 words. Answers with more than 100 words will not be graded.)
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