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 × delta) shares. The current delta is 0.60. 
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?
2. Write more call options.
3. Buy back some call options.

 

1. 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?
2. Write more call options.
3. Buy back some call options.

 

1. 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?
2. Write more call options.
3. Buy back some call options.

Answer rating: 100% (QA)

In the first scenario stock prices fell significantly A call options delta is positive so if the sto... View the full answer