- The Greek Letters Chapter 15 Fundamentals of Futures and Options Markets 6th Edition Copyright John C Hull 2007 15.1 Example(Page 325 A bank has

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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 15.1 The Greek Letters Chapter 15
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Fundamentals of Futures and Options Markets , 6 th Edition, Copyright © John C. Hull 2007 15.2 Example (Page 325) A bank has sold for $300,000 a European call option on 100,000 shares of a non-dividend- 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 , 6 th Edition, Copyright © John C. Hull 2007 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 , 6 th Edition, Copyright © John C. Hull 2007 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 , 6 th Edition, Copyright © John C. Hull 2007 15.5 Delta (See Figure 15.2, page 329) 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 , 6 th Edition, Copyright © John C. Hull 2007 15.6 Delta Hedging This involves maintaining a delta neutral portfolio The delta of a European call on a non- dividend-paying stock is N ( d 1 ) The delta of a European put on the stock is [ N ( d 1 ) – 1]
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This note was uploaded on 02/06/2012 for the course FINANCE 30090 taught by Professor O'neill during the Spring '11 term at University College Dublin.

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- The Greek Letters Chapter 15 Fundamentals of Futures and Options Markets 6th Edition Copyright John C Hull 2007 15.1 Example(Page 325 A bank has

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