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

Consider a European call option that is deep in the money with a short time to expiration. Which description of its delta is most accurate?

Delta is close to 1.0. A deep in-the-money call with little time left is almost certain to be exercised, so its value moves nearly one-for-one with the underlying stock. Delta near 0.5 characterizes at-the-money options, and call deltas are never negative.

  1. ADelta is close to 0.5 because the option is near expiry
  2. BDelta is close to 1.0, so the option behaves almost like the underlying stockCorrect
  3. CDelta is close to 0 because time value is small
  4. DDelta is close to -1.0 because the option is likely to be exercised

Explanation

A deep in-the-money call is very likely to finish in the money, so its value moves nearly one-for-one with the stock and delta approaches 1. A delta near 0.5 applies to at-the-money options, and a call's delta is never negative.

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