ASSIGNMENT 5

1. The vega of a derivatives portfolio dependent on the dollar-sterling exchange rate is 200
($ per %). Estimate the effect on the portfolio of an increase in the volatility of the
exchange rate from 12% to 14%.

2. The gamma of a delta-neutral portfolio is 30 (per $). Estimate what happens to the value
of the portfolio when the price of the underlying asset (a) suddenly increases by $2 and
(b) suddenly decreases by $2.

3. What does it mean to assert that the theta of an option position is 100 per day? If a
trader feels that neither a stock price nor its implied volatility will change, what type of
option position is appropriate?
4. What is meant by the gamma of an option position? What are the risks in the situation
where the gamma of a position is large and negative and the delta is zero?
5. The procedure for creating an option position synthetically is the reverse of the
procedure for hedging the option position. Explain this statement.
6. Why is an Asian option easier to hedge than a regular option?
7. Explain why there are economies of scale in hedging options.
8. The gamma and vega of a delta-neutral portfolio are 50 per $ and 25 per %, respectively.
Estimate what happens to the value of the portfolio when there is a shock to the market
causing the underlying asset price to decrease by $3 and its volatility to increase by 4%.
9. A financial institution has the following portfolio of over-the-counter options on sterling:

A traded option is available with a delta of 0.6, a gamma of 1.5, and a vega of 0.8.
(a) What position in the traded option and in sterling wouldmake the portfolio both
gamma neutral and delta neutral?
(b) What position in the traded option and in sterling wouldmake the portfolio both
vega neutral and delta neutral?

10. Consider again the situation in Problem 7.17. Suppose that a second traded option with
a delta of 0.1, a gamma of 0.5, and a vega of 0.6 is available. How could the portfolio be
made delta, gamma, and vega neutral?
Instructions:
a. Answer this question in groups with word and ppt format.
b. You should submit word, ppt and journals to my email.
c. Submit this assignment via email by only the team leader group to:
ika.pratiwi@president.ac.id
d. Subject email: ex: Group 1 Assignment 4, Group 2 Assignment 4, etc.
e. Submit deadline: Day minus 1 (one) before the class begin at 11.59 pm.
f. You have to make hard copy. Dont forget bring your flash disk for your presentation in
ppt.
g. The maximum time of presentation for each group: 30 minutes.

Thank you and good luck!