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Explanation:
Since one call option contract is equal to 100 shares, 200 call option contracts is equivalent to 20,000 shares. If the delta changes to 0.8, the number of shares needed to delta hedge is equal to 0.8 × 20,000 = 16,000. Therefore, the trader will need to purchase an additional 6,000 shares to maintain his delta hedge.
(Book 4, Module 62.2, LO 62.d)
Question 45
Suppose that a call option on Stock Y with a strike price of $50 trades at $3 and that the delta on this option is equal to 0.5. A derivatives trader currently owns 10,000 shares of Stock Y and delta hedges his position with 200 call option contracts. After the hedge is initiated, the price of Stock Y increases, which increases the delta of the call option to 0.8. In order to maintain his delta hedge, he should:
A
buy 4,000 shares.
B
sell 4,000 shares.
C
buy 6,000 shares.
D
sell 6,000 shares.
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