Delta Heding

balajismz
Finance Junkie
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Joined: Mon Nov 05, 2012 9:13 am

Delta Heding

Postby balajismz » Mon Nov 05, 2012 9:14 am

Hi Guys,

Can someone try this problem?

An investor is holding 10,000 shares of Shihaner which is trading $ 71. The put option on the same stock with a strike price of $70 has a delta of -0.47.
The number of call option contracts to create a delta neutral hedge and change in number of contracts if stock price changed to $70.(Assuming there are 100 options in 1 contract)
Choose one answer.
a. Long 208 option contracts and buy 23 contracts when stock price changed to $70
b. Long 192 option contracts and buy 25 contracts when stock price changed to $70
c. Short 208 option contracts and sell 23 contracts when stock price changed to $70
d. Short 192 option contracts and sell 25 contracts when stock price changed to $70

Balaji

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

Re: Delta Heding

Postby content.pristine » Tue Nov 06, 2012 2:30 pm

Let me give you a hint to the solution:
Delta Call - Delta Put =1
(This is from the put-call parity)

Now, tell me if you get the solution :D
8-)

balajismz
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Re: Delta Heding

Postby balajismz » Tue Nov 06, 2012 2:33 pm

I understand the forst bit of it, which is shorting 192 options, Can you please explain the 2nd bit??

Balaji

swarnendupathak
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Re: Delta Heding

Postby swarnendupathak » Tue Nov 06, 2012 2:59 pm

But by this formula we get Call Delta as 1-.47 = 0.53, so the no of call option to be shorted = 10000/(.53*100) = 188 Contract.
Now, my question can we assume that call strike price is also 70???? then we can get the revised delta as 0.50 as atm... is it a right approach???

Swarnendu

AMITAG1990
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Re: Delta Heding

Postby AMITAG1990 » Wed Nov 07, 2012 9:05 pm

I had also a same doubt, but even by that approach we cannt get a answer..

content.pristine
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Re: Delta Heding

Postby content.pristine » Fri Nov 09, 2012 1:51 pm

Swarnendu's approach is correct.
The options look wrong to me.
What is the source of this question?
8-)

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: Delta Heding

Postby balajismz » Fri Nov 09, 2012 1:58 pm

Source : Pristine mock test


Thanks,

Balaji

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Delta Heding

Postby swarnendupathak » Fri Nov 09, 2012 2:17 pm

1.Total shares are 10000, so to maintain the position delta=0, we need to Short 10000/0.53, call options = 189 contract (100 option = 1 contract)
2.Then when the price decreases to 70, then the option is at-the-money, which means delta is 0.50, so total option to be shorted = 10000/0.5 = 200 contract, so extra contract to be shorted = 200-189 = 11 contract.
3.So, the answer should be Short 189 contract & again sell 11 contract, as both of these are not there in the options, think the given answers are not correct.
Please make me correct if i am wrong..


Swarnendu


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