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Answer: Short 1,281 futures.
## Explanation To delta-hedge an option position using futures contracts, we need to consider: 1. **Delta of the option position**: This represents the sensitivity of the option's value to changes in the underlying asset price. 2. **Delta of the futures contract**: For a futures contract, the delta is typically 1 (for the underlying asset itself) or adjusted for the risk-free rate when using futures for hedging. 3. **Hedging direction**: If the option position has positive delta (long calls), we need to short futures to offset the directional exposure. If the option position has negative delta (long puts), we need to long futures. Given that the question mentions making the option position delta-neutral and provides specific numbers (1,281 vs 1,300), the correct answer is **B. Short 1,281 futures** because: - The calculation likely involves adjusting for the risk-free rate (3%) over the 6-month period - The difference between 1,281 and 1,300 suggests a small adjustment factor - Short position is typically required when hedging long option positions with positive delta - The precise number 1,281 accounts for the time value and risk-free rate adjustment in the delta calculation
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The company decides to use the exchange-traded futures instead of the underlying itself to delta-hedge the option position. In order to make the option position delta-neutral, how many futures contracts should the company long or short? Suppose that the current risk-free rate is 3%, and both the options and futures are due in six months.
A
Long 1,281 futures.
B
Short 1,281 futures.
C
Long 1,300 futures.
D
Short 1,300 futures.
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