University:
CFA Institute
Course:
CFA Level 2 | Derivative Investments
Academic year:

2022
Views:

190

Pages:

2
Author:

anon

CFA Level 2 - Derivative Investments Session 17-Reading 62 Option Markets and Contracts-LOS e (Practice Questions, Sample Questions) 1. As a portfolio manager for the Herron Investments, an analyst is interested in establishing a dynamic hedge for one of his clients, Lou Gier. Gier has 200,000 shares of a stock that he believes could take a dive in the near future. Suppose that a call option with an exercise price of $100 and a maturity of 90 days has a price of $7. Also assume that the current stock price is $95 and the risk free rate is 5%. Assuming that the delta value of call option is 0.70, how many call option contracts would be needed to create a delta neutral hedge? A) 2,857 contracts. (Explanation: The number of call options needed is 200,000 / 0.70 = 285,714 options or approximately 2,857 contracts. Since Gier is long the stock, he should short the calls) B) 2,000 contracts. C) 285,714 contracts 1.2. When a delta neutral hedge has been established using call options, which of the following statements is most correct? As the price of the underlying stock: A) changes, no changes are needed in the number of call options purchased. B) increases, some option contracts would need to be sold in order to retain the delta neutral position. C) increases, some option contracts would need to be repurchased in order to retain the delta neutral position (Explanation: As the stock price increases, the delta of the call option increases as well, requiring fewer option contracts to hedge against the underlying stock price movements. Therefore, some options contracts would need to be repurchased in order to maintain the hedge) 2. In order to form a dynamic hedge using stock and calls with a delta of 0.2, an investor could buy 10,000 shares of stock and: A) write 2,000 calls. B) write 50,000 calls. (Explanation: Each call will increase in price by $0.20 for each $1 increase in the stock price. The hedge ratio is –1/delta or –5. A short position of 50,000 calls will offset the risk of 10,000 shares of stock over the next instant) C) buy 50,000 calls 3. The delta of an option is equal to the: A) dollar change in the stock price divided by the dollar change in the option price. B) percentage change in option price divided by the percentage change in the asset price. C) dollar change in the option price divided by the dollar change in the stock price (Explanation: The delta of an option is the dollar change in option price per $1 change in the price of the underlying asset) 4. An instantaneously riskless hedged portfolio has a delta of: A) 0. (Explanation: A riskless portfolio is delta neutral, the delta is zero) B) anything, gamma determines the instantaneous risk of a hedge portfolio. C) 1

Session 17 - Reading 62 Option Markets and Contracts-LOS e

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