I refer to page 277, Vol 5 (CFAI) text - Can anyone explain the logic for the answer for Question 19 ? It is also a 2006 exam question. Thanks!
The Q is actually from Reading 39, though given with Reading 40. Sure had a covered call. So, he is short call. The dealer took the opposite side, so he is long call. To hedge his own risk, he should sell the underlying. This Q is opposite of what we usually see with other hedges. For example, We will be long quantity X, so we short its derivative OR we will be short quantity Y, so we go long on its derivative. Here we are already long the derivative, so reverse logic is to go short the underlying. This is not an elegant explanation, and probably I need to study the answer on A-20 a bit closely. A reading of P201, Reading 39 may be helpful.
Thanks abacus. Now I understand - Selling the underlying part of the question. What is the deal with " Long calls have positive delta". I tried thinking in terms of delta definition, my brain is now a mush… I give up. Any good explanation ?