The delta and gamma of the portfolio held by an option dealer are + 178 and -322, respectively. The gamma of both calls and puts with strike price of $21 and with three months to maturity is 0.046. The current market price of the underlying non- dividend paying share is $25. The implied volatility of the share is 30% p.a. and three-month risk-free interest rate 3.83% p.a. What would be the most cost-efficient way to make the portfolio delta- gamma -neutral based on transactions on either of the options and the underlying shares?

The delta and gamma of the portfolio held by an option dealer are + 178 and -322, respectively. The gamma of both calls and puts with strike price of $21 and with three months to maturity is 0.046. The current market price of the underlying non- dividend paying share is $25. The implied volatility of the share is 30% p.a. and three-month risk-free interest rate 3.83% p.a. What would be the most cost-efficient way to make the portfolio delta- gamma -neutral based on transactions on either of the options and the underlying shares?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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