QUESTION $10$:

Circle or highlight the correct answer.

Your company uses the following delta$-$hedging strategy of a long position in A&B shares and a short position in call options. Each call option is on one share of A&B$.$ A&B does not pay dividends. Your portfolio has a short position in $1,000$ call options and a long position in $(1000\backslash$times delta$)$ shares. The current delta is $0\mathrm{.}60.$ Your company trades continuously in the options market in order to always maintain the correct hedge ratio of call options per A&B shares.

$1.$ Suppose that the stock price FELL substantially today. All else being equal, which trade below is necessary to maintain the desired hedge ratio?

a$)$ Write more call options.

b$)$ Buy back some call options.

$2.$ Your call options are IN$-$the$-$money. Suppose that the time to option's expiration is shorter by one month. All else being

equal, which trade below is necessary to maintain the desired hedge ratio?

a$)$ Write more call options.

b$)$ Buy back some call options.

$3.$ Your call options are IN$-$the$-$money. Suppose that the stock price volatility DECREASED substantially. All else being

equal, which trade below is necessary to maintain the desired hedge ratio?

a$)$ Write more call options.

b$)$ Buy back some call options.