Skip to content

CA Final · Advanced Financial Management · Risk Management

A call option on shares of Kaveri Motors has a delta of 0.60. An investor holds 5,000 shares and wants to be delta-neutral using only these call options (each option covers one share). Which position achieves this?

The investor should write about 8,333 call options. The shares carry a delta of 5,000, and each written call offsets 0.60 of it, so 5,000 divided by 0.60 gives roughly 8,333 options, leaving the portfolio delta-neutral.

  1. AWrite about 8,333 call optionsCorrect
  2. BBuy about 8,333 call options
  3. CWrite 3,000 call options
  4. DBuy 3,000 call options

Explanation

Long 5,000 shares has delta +5,000. A written call has delta -0.60 per option. Options needed = 5,000/0.60 = 8,333 written. Buying calls would add to positive delta, and 3,000 uses delta multiplied rather than divided.

Did you get it right without looking?

One question tells you little. A timed set on Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Risk ManagementFree diagnostic mock

More Risk Management questions