Ch15HullFundamentals5thEd

Ch15HullFundamentals5thEd - The Greek Letters Chapter 15...

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Fundamentals of Futures and Options Markets , 5 th Edition, Copyright © John C. Hull 2004 15.1 The Greek Letters Chapter 15
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Fundamentals of Futures and Options Markets, 5th Edition, 15.2 Example (Page 317) A bank has sold for $300,000 a European call option on 100,000 shares of a nondividend paying stock S 0 = 49, K = 50, r = 5%, σ = 20%, T = 20 weeks, μ = 13% The Black-Scholes value of the option is $240,000 How does the bank hedge its risk?
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Fundamentals of Futures and Options Markets, 5th Edition, 15.3 Naked position Take no action Covered position Buy 100,000 shares today Both strategies leave the bank exposed to significant risk
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Fundamentals of Futures and Options Markets, 5th Edition, 15.4 Stop-Loss Strategy This involves: Buying 100,000 shares as soon as price reaches $50 Selling 100,000 shares as soon as price falls below $50 This deceptively simple hedging strategy does not work well
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Fundamentals of Futures and Options Markets, 5th Edition, 15.5 Delta (See Figure 15.2, page 321) Delta ( ) is the rate of change of the option price with respect to the underlying Option price A B Slope = Stock price
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Fundamentals of Futures and Options Markets, 5th Edition, 15.6 Delta Hedging This involves maintaining a delta neutral portfolio The delta of a European call on a stock paying dividends at rate q is N ( d 1 ) e qT The delta of a European put is e qT [ N ( d 1 ) – 1]
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This note was uploaded on 10/07/2011 for the course FIN 416 taught by Professor Sankarshanacharya during the Fall '11 term at Ill. Chicago.

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Ch15HullFundamentals5thEd - The Greek Letters Chapter 15...

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