# 2Q on Schweser 1PM (FRA & Deriv)

1. Answer is that no adjustment is necessary for profit from intercompany transactions because all COGS were sold to a third party in 2010. If the goods were NOT sold in 2010, what would the correct choice be…I assume A? Any place I can find a Q on this where you have to do the math–I think it’s a weak point of mine. 110. Explanation: “The hedge must be continually rebalanced, even in the unlikely event that the stock price doesn’t change, because the option’s delta changes as time passes and the option approaches maturity.” I don’t see why you need to continue to rebalance if price doesn’t change because I don’t see why delta is changing. Delta is the change in call price as stock price changes, so if stock price is not changing delta would not change and therefore no rebalancing of the delta hedge should be needed. The idea that “the option’s delta changes as time passes” seems wrong since delta is not a function of time.

delta does change as time passes for options. as time to maturity comes closer - think the BSM option pricing model - your option price is continuously changing. (Also think Put-Call Parity with continuous risk free rate, if you will). so the delta dynamic hedge, needs to be continuously rebalanced.

If you had calc in college, think of the delta as the first derivative of the BSM model with regards to S for calls and puts. Then you will see that if the variables change, the value will change as well with regards to time, volatility, risk free rate.

So the delta hedge has to be continually rebalanced no matter what the price of the stock does? What is the point/benefit of the delta hedge as it seems so costly? Is the argument simply that the cost of rebalancing is way less than the cost you would incur if an unfavorable stock price movement would occur?

delta (for longer dated options, 6m and longer) does not change so dramatically due to time to be rebalanced continually. for short dated options it may be needed to do some scenarios and guess optimal delta. if value option changes and the value is pure time value, you have theta to earn/lose it back with option portfolio you are never able to mitigate all risks completely, usually as a trader you actually want to have some risks, so some residual delta is no problem as for greeks, anything changes when any input changes in fact, this gets more interesting when you have exotic options in your portfolio (vega changes when spot moves, time passes or vol changes…)

the show NY Wrote: ------------------------------------------------------- > 76. Answer is that no adjustment is necessary for > profit from intercompany transactions because all > COGS were sold to a third party in 2010. If the > goods were NOT sold in 2010, what would the > correct choice be…I assume A? Any place I can > find a Q on this where you have to do the math–I > think it’s a weak point of mine. Look at Financial Analysis page 29 to 31 on the examples 5 and 6. It explains it well with math calculations.

joseph, this was very helpful as it also tied in the goodwill/purchase over BV elements. i get everything in example 5 and 6 except for the very end of example 6. if the remainder of the inventory is sold in 2010, why do you need to adjust the 2010 NI by 25% x 16,000? in 2009, you did not subtract the 75% that was sold that year. in the schweser exam Q #76 that i referenced initially, they say that you do not make any adjustments for inventory sold to a third party that year so wondering why the 25% x 16,000 is needed.