CA Final · Advanced Financial Management · Derivatives Analysis and Valuation
A fund holds 6,000 shares of Narmada Steel and wants to be delta-neutral by writing call options on the same share. Each call covers one share and the Black-Scholes delta of the call, N(d1), is 0.60. How many calls should the fund write?
The fund should write 10,000 calls. Each call has a delta of 0.60, so the shares' delta of 6,000 is offset by 6,000 divided by 0.60 calls. Multiplying instead of dividing would give 3,600, which under-hedges the position.
- A3,600
- B6,000
- C10,000Correct
- D15,000
Explanation
Each short call has delta -0.60 per share. Required calls = 6,000 / 0.60 = 10,000. Multiplying 6,000 by 0.60 gives 3,600, which inverts the hedge ratio.
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