Question

A bank's position in options on the dollar/euro exchange rate has a delta of 30,000 and a gamma of $-80,000$. Explain how these numbers can be interpreted. The exchange rate (dollars per euro) is 0.90 . What position would you take to make the position delta neutral? After a short period of time, the exchange rate moves to 0.93 . Estimate the new delta. What additional trade is necessary to keep the position delta neutral? Assuming the bank did set up a delta-neutral position originally, has it gained or lost money from the exchange-rate movement?

   A bank's position in options on the dollar/euro exchange rate has a delta of 30,000 and a gamma of $-80,000$. Explain how these numbers can be interpreted. The exchange rate (dollars per euro) is 0.90 . What position would you take to make the position delta neutral? After a short period of time, the exchange rate moves to 0.93 . Estimate the new delta. What additional trade is necessary to keep the position delta neutral? Assuming the bank did set up a delta-neutral position originally, has it gained or lost money from the exchange-rate movement?

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 19, Problem 22

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Step 1

- Gamma (Γ) of $-80,000$ indicates that the delta itself will change by $-80,000$ for every 1 unit change in the exchange rate. This means the delta is expected to decrease as the exchange rate increases. Show more…

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A bank's position in options on the dollar/euro exchange rate has a delta of 30,000 and a gamma of $-80,000$. Explain how these numbers can be interpreted. The exchange rate (dollars per euro) is 0.90 . What position would you take to make the position delta neutral? After a short period of time, the exchange rate moves to 0.93 . Estimate the new delta. What additional trade is necessary to keep the position delta neutral? Assuming the bank did set up a delta-neutral position originally, has it gained or lost money from the exchange-rate movement?

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