A financial institution has the following portfolio of over-the-counter options on sterling: ...
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Finance
A financial institution has the following portfolio of over-the-counter options on sterling:
Type
Position
Delta of Option
Gamma of Option
Vega of Option
Call
1,000
0.50
2.2
1.8
Call
500
0.80
0.6
0.2
Put
2,000
0.40
1.3
0.7
Call
500
0.70
1.8
1.4
A traded option is available with a delta of 0.6, a gamma of 1.5, and a vega of 0.8.
(a) What position in the traded option and in sterling would make the portfolio both gamma neutral and delta neutral?
(b) What position in the traded option and in sterling would make the portfolio both vega neutral and delta neutral?
(c) Suppose that a second traded option with a delta of 0.1, a gamma of 0.5, and a vega of 0.6 is available. How could the portfolio be made delta, gamma, and vega neutral?
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