Person own 5,000 shares of a company and wants to hedge their exposure to price fluctuations in the stock over the next 90 days. She has the following delta’s to work with: 1 month call delta: 0.54 3 month call delta:0.58 6 month call delta: 0.61 9 month call delta:0.63 Which of the following positions will delta hedge the long position in the stock? A. Short 9,259 1-month call options. B. Short 8,197 3-month call options. C. Long 8,197 6-month call options. D. Long 7,937 9-month call options.
well should be b but the number is wrong should be 8600 something
Shares Delta NumOfOptionContracts 5000 0.54 9259.259259 5000 0.58 8620.689655 5000 0.61 8196.721311 5000 0.63 7936.507937 A. Only number matches up.
I come up with short (5000/.58) = 8620 of the 3-month calls.
I think it’s a mstake if not A would offer hedging but not for the period stated
lxwqh Wrote: ------------------------------------------------------- > Shares Delta NumOfOptionContracts > 5000 0.54 9259.259259 > 5000 0.58 8620.689655 > 5000 0.61 8196.721311 > 5000 0.63 7936.507937 > > A. Only number matches up. Can you show the calculations?
has to be A or B out of those b/c you short calls- A’s # lines up but only hedges for 30 of your 90 days so I guess you’d have to tweak it after that, B’s # leaves you short a few call options for a nice hedge. I’d go with A here if I had to pick one.
The correct answer is A. I had thought it was B too florinpop From Schweser: the person is long in the underlying stock, so she should short call options, and she can use any of the options to delta hedge. The hedge ratio (the number of calls per share) is (1 / delta), so any of these four short call positions will hedge her long position in the stock. So basically any call option regardless of the term will hedge the position.
florinpop Wrote: ------------------------------------------------------- > I think it’s a mstake if not A would offer hedging > but not for the period stated It’s not a mistake, I thought that at first too (are we twins? lol) but the same question showed up on the 2006 book 6 and 2007 book6 and both had “A” as the correct answer.
A A delta hedge using either of the calls would have to be rebalanced anyways, so the term of the call doesn’t matter.
dude, when you use delta hedge, you basically want to hedge out the short term market fluctuations of the stock price. You can never hedge the stock portfolio in the long term… So the term doesn’t matter a bit. As a portfolio manager, you are responsible for hedging this dynamically and continually adjusting the number of options along the way… Otherwise you are violating the CFA Ethics and Professional conducts III A. 
in exam conditions I would have gone for A too since you assume there are no mistakes this is a semi b/s question
lxwqh Wrote: ------------------------------------------------------- > dude, when you use delta hedge, you basically want > to hedge out the short term market fluctuations of > the stock price. You can never hedge the stock > portfolio in the long term… So the term doesn’t > matter a bit. As a portfolio manager, you are > responsible for hedging this dynamically and > continually adjusting the number of options along > the way… Otherwise you are violating the CFA > Ethics and Professional conducts III A. ok i get it then it’s a good question