Estimate what happens to the value of the delta and gamma neutral portfolio when there is a shock to the foreign exchange market causing pounds sterling drop by 5% and its volatility increase from 11% to 12%. Note that Vega is in the unit of per %. You can ignore the elapsed time in this case (At = 0).
Estimate what happens to the value of the delta and gamma neutral portfolio when there is a shock to the foreign exchange market causing pounds sterling drop by 5% and its volatility increase from 11% to 12%. Note that Vega is in the unit of per %. You can ignore the elapsed time in this case (At = 0).
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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Question
Transcribed Image Text:5. A financial institution has the following portfolio of over-the-counter derivatives on
pounds sterling:
Туре
Position
Delta of
Gamma of
Vega of
Option/Forward Option/Forward Option/Forward
Call
-1,000
0.5
2.2
1.8
Put
-2,000
-0.4
1.3
0.7
Call
-500
0.7
1.8
1.4
Forward
1,000
-1
A traded option is available with a delta of 0.6, a gamma of 1.5, and a Vega of 0.8.
Transcribed Image Text:Estimate what happens to the value of the delta and gamma neutral portfolio when there is a
shock to the foreign exchange market causing pounds sterling drop by 5% and its volatility
increase from 11% to 12%. Note that Vega is in the unit of per %. You can ignore the elapsed
time in this case (At = 0).
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