FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"
A delta-neutral portfolio has a gamma of -2,400 (change in portfolio delta per $1 move in the stock). The stock price rises suddenly by $2. Using a delta-gamma approximation, what is the portfolio's delta immediately after the move, and what share trade restores neutrality?
After the $2 rise the portfolio delta is minus 4,800, because gamma of minus 2,400 times a $2 move changes delta by that amount. The trader restores delta neutrality by buying 4,800 shares.
- ADelta is -4,800; buy 4,800 sharesCorrect
- BDelta is -4,800; sell 4,800 shares
- CDelta is +4,800; buy 4,800 shares
- DDelta is -2,400; buy 2,400 shares
Explanation
New delta = 0 + (-2,400 x 2) = -4,800. To restore neutrality add +4,800 delta by buying 4,800 shares. Selling would worsen the negative delta.
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