A trader buys call options from a client, and to hedge risk, sells shares of the underlying stock from his inventory. If the price of the underlying stock goes up, in order to maintain a proper hedge the trader should
A. Buy back some shares.
B. Sell more shares.
C. Do nothing.
2.A bank has the following positions in options on stock X:
· A long position in 100,000 calls, where the delta of each call is 0.5.
· A short position in 200,000 calls, where the delta of each call is 0.4.
· A short position in 50,000 puts, where the delta of each put is -0.5.
The bank’s portfolio can be made delta-neutral by taking
A long position of 5,000 stocks X
A short position of 5,000 stocks X
A long position of 105,000 stocks X
A short position of 105,000 stocks X
3.Which of the following statements is TRUE?
A. A company knows that it will sell 1,000 barrels of crude oil in September. The company can completely lock in the price it will receive by shorting October futures contracts on crude oil.
B. If there is no basis risk, the optimal hedge ratio is equal to 1.
C. If the optimal hedge ratio is equal to 1, the hedge must be perfect.
D. All of the above.