I am writing about book one of the schewser practive exams page question 18.2. The answer given is both are correct. I disagree with one of the statements. Please tell me if you agree or where I’m wrong… Bentley states that if the price of the underlying bond increases by 1% due to a yield curve shift, then the call hedge should be decreased because delta would have increased. I agree that if the bond price increases, delta would also increase (given gamma). However, that means that the call value would be too low and need to be increased, not decreased right? delta= change in call/change in bond…if change in bond price goes up and change in delta goes up then the call would need to go higher not lower right? Please help!!
Sounds to me like schweser’s right.
well i didnt see it in updates so i figured they were, but where is my logic wrong? Page 79 of book 5 states, using delta to estimate the increase in a call price from an increase in the underlying assets price will produce an estimated value of the call price that is too low. (that is becuase delta should have been greater)… isn’t this the exact situation, but the practice exam is saying that you would need to lower the value of the call price because delta went up. Its the opposite…you would need to raise it, becasue it is too low.
Bump… can anyone explain the discrepency? or why i think there is one i should say?
one more try…anyone?