Chapter 17 Greek Letters Summary .docx - Chapter 17 Greek Letters Textbook Summary Notes SUMMARY Financial institutions offer a variety of option

Chapter 17 Greek Letters Summary .docx - Chapter 17 Greek...

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Chapter 17 Greek Letters Textbook Summary Notes SUMMARY Financial institutions offer a variety of option products to their clients. Often the options do not correspond to the standardized products traded by exchanges. The financial institutions are then faced with the problem of hedging their exposure. Naked and covered positions leave them subject to an unacceptable level of risk. One course of action that is sometimes proposed is a stop-loss strategy. This involves holding a naked position when an option is out of the money and converting it to a covered position as soon as the option moves into the money. Although superficially attractive, the strategy does not provide a good hedge. The delta, Á , of an option is the rate of change of its price with respect to the price of the underlying asset. Delta hedging involves creating a position with zero delta (sometimes referred to as a delta-neutral position). Because the delta of the underlying asset is 1.0, one way of hedging is to take a position of À Á
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