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FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

A portfolio manager has a book of options with a net vega of -12,000 per 1% change in volatility. An at-the-money option available for trading has a vega of 0.30 per share per 1% volatility change, and each contract covers 100 shares. How many contracts must be bought to make the portfolio vega-neutral?

Buy 400 contracts. Each contract has vega of 30 (0.30 times 100 shares), and the portfolio needs +12,000 to offset its -12,000 vega. Dividing 12,000 by 30 gives 400 long contracts; selling would worsen the exposure.

  1. A400 contracts boughtCorrect
  2. B400 contracts sold
  3. C40,000 contracts bought
  4. D1,200 contracts bought

Explanation

Vega per contract = 0.30 × 100 = 30. The portfolio needs +12,000 of vega, so 12,000 / 30 = 400 contracts bought. Selling would make the vega more negative. Forgetting the 100-share multiplier gives 40,000.

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