question archive A bank's position in options on the dollar-euro exchange rate has a delta of 20,000 and a gamma of -60,000
A bank's position in options on the dollar-euro exchange rate has a delta of 20,000 and a gamma of -60,000
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A bank's position in options on the dollar-euro exchange rate has a delta of 20,000 and a gamma of -60,000. The exchange rate (dollars per euro) is 1.20. With these parameters, what position would you take to make the position delta neutral? After a short period, the exchange rate moves to 1.22. Estimate the new delta. What additional trade is necessary to keep the position delta neutral?
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In this
delta neutral position bank should take short position in 20,000 euros.
After a short period of time exchange rate moves to 1.22.
So the delta of bank's position decreases by (1.22-1.20)*60,000 = 1200.
New delta = 20,000 - 1200 = 18,800
Now to keep bank's position delta neutral, bank should reduce it short position in euros by 1200.
Therefore now bank's new delta neutral hedge position should be 18,800 Euros as short position.
