FRM -L1 2011

[sl]

Hi David,

I am bit confused by the answer to this question. I thought I had understood the concept. This is my understanding of the problem. The trader is long 200 call options, so the delta of the position is (long (200*100)*(0.5)=10,000. In order to hedge the option exposure, I would need to short (10,000) shares. Can
you please clarify my doubt?

I have seen similar examples, although in those problems, there was no mention of how many shares each contract controls, but should that make any difference?

The answer is a

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.

Thanks
Sundeep

 

[David Harper CFA FRM]

Hi Sundeep,

You are not confused, the sample question is very wrong; please see http://forum.bionicturtle.com/viewthread/4882/
(if the number of shares per contract are omitted, that is because it assume options on 100 shares per contract.)

Thanks, David

 

[bhar]

Hi This thread is unavailable. I am a member. Could you please make it available -http://forum.bionicturtle.com/viewthread/4882/

 

[Suzanne Evans]

Hi This thread is unavailable. I am a member. Could you please make it available -http://forum.bionicturtle.com/viewthread/4882/

Hi bhar,

When we relaunched the new forum, linked did not remain and were redone according to the new forum. I apologize. I did a quick search for the question that was asked above. I'm assuming you might be looking for this thread: http://forum.bionicturtle.com/threads/l1-2-18-greek-letters-valuation.4145/

Thanks,
Suzanne

 

[David Harper CFA FRM]

Suzanne, thanks for the backup (I noticed the likes), really appreciate it on a busy forum day. phew, i am almost cranky

 

[Suzanne Evans]

Suzanne, thanks for the backup (I noticed the likes), really appreciate it on a busy forum day. phew, i am almost cranky

In your defense, the forum has been VERY busy! I'd say non-stop. Thank you for being patient and providing all the support to the students

 

[Aleksander Hansen]

No kidding, I get dizzy just trying to browse through the convexity and duration stuff posted only today as it seems to change every few hours.
Forget cranky, I'd already be throwing the angry [ ] emoticons around....

Thanks for churning out questions and answers with high efficiency!