FMP Quiz responses to 20 Questions in the Word document

maheshnath
Posts: 7
Joined: Sat Sep 22, 2012 3:00 pm

FMP Quiz responses to 20 Questions in the Word document

Postby maheshnath » Sat Sep 22, 2012 3:04 pm

Hi,

The response to question 12 - "A Trader......................keep it delta neutral " seems to be incorrect. The response provided is option A, but i feel option B is the right answer because we are trying to hedge a long call exposure so the appropriate strategy will be to Sell 10,000 shares of GM and not to Buy...Can you please confirm this.

Thanks

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: FMP Quiz responses to 20 Questions in the Word document

Postby content.pristine » Sat Sep 22, 2012 8:02 pm

Hi Mahesh,

I'm not aware of the quiz your instructor gave you. :?
Can you please type out the question option and solution?
I would be glad to help you out then.. ;)

8-)

maheshnath
Posts: 7
Joined: Sat Sep 22, 2012 3:00 pm

Re: FMP Quiz responses to 20 Questions in the Word document

Postby maheshnath » Sun Sep 23, 2012 1:41 pm

Here it is..

12. A trader in your bank has bought 200 call option contracts each on 100 shares of General Motors with time to maturity of 60 days at USD 2.10. The delta of the option on one share is 0.50. As a risk manager, what action must you take on the underlying stock in order to hedge the option exposure and keep it delta neutral?
A. Buy 10,000 shares of General Motors.
B. Sell 10,000 shares of General Motors.
C. Buy 1,000 shares of General Motors.
D. Sell 1,000 shares of General Motors.
Ans: A.
─ Number of Calls = 200 Contracts * 100 = 20,000 Calls
─ Hedged by 20000 * .50 = 10000 shares
─ So, one needs to buy 10,000 shares in order to keep the position delta neutral.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: FMP Quiz responses to 20 Questions in the Word document

Postby content.pristine » Mon Sep 24, 2012 1:41 pm

Hi Mahesh,

You are absolutely right.
Since you are buying the call, you would require to sell the stock in order to maintain a delta neutral portfolio..

8-)


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