Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. 10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is hedged against: a. Small price changes in the underlying asset. b. Small price decreases in the underlying asset. c. All price changes in the underlying asset. 11. After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the underlying stock price. If you draw such a diagram, delta is the: a. Slope in the option price diagram. b. Curvature of the option price graph. c. Level in the option price diagram. 12. Washington considers a put option that has a delta of -0.65. If the price of the underlying asset decreases by $6, then what is the best estimate of the change in option price?
Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. 10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is hedged against: a. Small price changes in the underlying asset. b. Small price decreases in the underlying asset. c. All price changes in the underlying asset. 11. After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the underlying stock price. If you draw such a diagram, delta is the: a. Slope in the option price diagram. b. Curvature of the option price graph. c. Level in the option price diagram. 12. Washington considers a put option that has a delta of -0.65. If the price of the underlying asset decreases by $6, then what is the best estimate of the change in option price?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected.
10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is hedged against:
a. Small price changes in the underlying asset.
b. Small price decreases in the underlying asset.
c. All price changes in the underlying asset.
11. After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the underlying stock price. If you draw such a diagram, delta is the:
a. Slope in the option price diagram.
b. Curvature of the option price graph.
c. Level in the option price diagram.
12. Washington considers a put option that has a delta of -0.65. If the price of the underlying asset decreases by $6, then what is the best estimate of the change in option price?
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