Answer: USD 0.32

The question is asking for the Value at Risk (VaR) of a long position in an at-the-money put option on Big Pharma, Inc. stock using the delta-normal method at a 95% confidence level over a 1-day holding period. The stock price is USD 26.00, and the daily volatility is 1.5%. The delta of the put option is -0.5. The delta-normal method is a simplified approach to calculate VaR for non-linear derivatives like options. It uses the delta of the option, which represents the sensitivity of the option's price to a small change in the underlying asset's price, and assumes a normal distribution of returns. The formula for VaR using the delta-normal method is: \[ \text{VaR} = |\Delta| \times Z \times \sigma \times S \] Where: - \( |\Delta| \) is the absolute value of the delta of the option (0.5 in this case). - \( Z \) is the z-score corresponding to the desired confidence level (1.645 for 95%). - \( \sigma \) is the daily volatility of the stock (0.015 or 1.5%). - \( S \) is the current stock price (USD 26.00). Plugging in the values, we get: \[ \text{VaR} = 0.5 \times 1.645 \times 0.015 \times 26 = USD 0.32 \] Thus, the correct answer is A. USD 0.32. This is the amount that the investment could lose with 95% confidence within one day, assuming normal market conditions and using the delta-normal method for calculating VaR.

Author: LeetQuiz Editorial Team