FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"
A trader is short 10,000 European call options on a non-dividend-paying stock. Each option has a delta of 0.55. To make the position delta-neutral, the trader should:
The trader should buy 5,500 shares. The short calls have a combined delta of -5,500 (0.55 times 10,000, with a negative sign for being short), so holding 5,500 long shares brings the net delta of the portfolio to zero.
- ABuy 5,500 sharesCorrect
- BSell 5,500 shares
- CBuy 10,000 shares
- DSell 4,500 shares
Explanation
A short call position has delta of -0.55 x 10,000 = -5,500 shares. Buying 5,500 shares adds +5,500 and offsets it to zero. Selling shares would double the negative exposure; 10,000 shares ignores the delta scaling.
Did you get it right without looking?
One question tells you little. A timed set on Option Sensitivity Measures: The "Greeks" shows your real accuracy, how long you take and where you lose marks.
More Option Sensitivity Measures: The "Greeks" questions
- A European call on a non-dividend-paying stock has K = 90 and T = 1.5 years. The risk-free rate is 4% continuously compounded, with e^(-0.06…
- A market maker is short options with portfolio delta of 0 and portfolio gamma of -4,000. The underlying then moves by $3 in either direction…
- A trader holds European options on a non-dividend-paying stock and considers the effect of a small parallel rise in the risk-free rate, with…
- A dealer has sold 20,000 call options on a stock, each with delta 0.50 and gamma 0.04. The dealer is delta-hedged with shares. The stock pri…
- A dealer has sold 4,000 call options (delta 0.50, gamma 0.04 per option) and is delta-hedged with shares. The dealer wants to become both de…
- A portfolio of options on a stock has a delta of 0.20 and a gamma of 0.05 (per $1 move in the stock). The stock price rises by $2. Using a d…