Financial Risk Manager Part 1
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A junior trader at an equity hedge fund is assessing the market risk of an option position. The option is a call option on stock MTP, which is currently trading at USD 92 per share. The trader has valued the option using a binomial tree, the three left-most nodes of which are shown below:
Stock price A
92.00
5.20
Option value
B
98.88
9.25
C
85.59
1.02
Stock price A
92.00
5.20
Option value
B
98.88
9.25
C
85.59
1.02
Given this information, and assuming the length of each time step in the tree is very short, which of the following conclusions would the trader be correct to reach?
A
The option delta is approximately 0.62, therefore a portfolio consisting of a short position in 62 options and a long position in 100 shares would have the same value at node B or node C.
B
The option delta is approximately 0.62, therefore if the stock price increases by USD 1, the option price would increase by approximately USD 0.62.
C
The option delta is approximately 0.94, therefore a portfolio consisting of a short position in 94 options and a long position in 100 shares would have the same value at node B or node C.
D
The option delta is approximately 0.94, therefore if the stock price increases by USD 1, the option price would increase by approximately USD 0.94.