Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. 10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is hedged against: a. Small price changes in the underlying asset. b. Small price decreases in the underlying asset. c. All price changes in the underlying asset. 11. After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the underlying stock price. If you draw such a diagram, delta is the: a. Slope in the option price diagram. b. Curvature of the option price graph. c. Level in the option price diagram. 12. Washington considers a put option that has a delta of -0.65. If the price of the underlying asset decreases by $6, then what is the best estimate of the change in option price?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would most likely experience a slight downturn and suggested delta-hedging the BIC portfolio. As predicted, the U.S. equity markets did indeed experience a downturn of approximately 4% over a 12-month period. However, portfolio performance for BIC was disappointing, lagging its peer group by nearly 10%. Washington has been told to review the options strategy to determine why the hedged portfolio did not perform as expected. 10. Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio is hedged against: a. Small price changes in the underlying asset. b. Small price decreases in the underlying asset. c. All price changes in the underlying asset. 11. After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the underlying stock price. If you draw such a diagram, delta is the: a. Slope in the option price diagram. b. Curvature of the option price graph. c. Level in the option price diagram. 12. Washington considers a put option that has a delta of -0.65. If the price of the underlying asset decreases by $6, then what is the best estimate of the change in option price?
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