E
examstudent
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Hi
I failed ST6, no surprises there, but I have a query about the interpretation on question 3 in the paper.. i wonder if somebody could let me know why my interpretation was the opposite to the examiners
I have printed the question in full below,
Basically I assumed you were short N1, N2, N3 put option, the examiner solution assume you are long N1, N2,N3 put options
Question 3 ST6 2005
Consider a portfolio of derivatives on an equity total return index. The portfolio consists of:
N1 sold put options, strike X1 term T1
N2 sold put options, strike X2 term T2
N3 sold put options, strike X3 term T3.
Portfolio value is Vt at time T. Assme all options are adequately valued using the Black Scholes Pricing Formula
(i) Give definitions for Delta Gamma Theta Rho of portfolio
(ii) Derive formulae for Delta and Gamma of portfolio given current index value So
(iii) Describe what would happen to value of Delta if index were to fall by 50%.
(iv) Discuss the relative merits of seeking portfolio insurance by purchasing a put option from a third party, as opposed to pursuing a dynamic hedging strategy.
EXAMINER SOLUTION: has assumed we have a long position in N1 put options, N2 put optiosn, N3 put options and Hence report says total weighted delta is negative
MY INTERPRETATIONS: At the top of question, it says the portfolio consists of Ni sold put options i=1,2,3. I took his to mean we are short N1 put options, short N2 putT options and short N3 put options - Hence I thought our positions are N1,-N2,--N3 and so total delta is hence positive for the aggregate short position in put options
( if you look at ACID paper 1 1998 Q10, it says the options are SOLD and hence associates a short position (negative sign) to the positions in that question, and hence positive delta
If you look at CID paper 2003 question 5, it says that you have sold Put options and hence associates a negative sign or short position, and the total delta of the short option position is positive)
I was even more inclined to stick with my assumptions of being short the put options because of the nature of part (iii) the portfolio holder would be worried if the market fell by 50% as he would lose out on the short puts .
Indeed in part (iv), we are asked to consider insurance by buying puts presumably (long puts) well if the portfolio in this question was short puts (positive delta) you could neutralise your position by buying long puts (negative delta) if the portfolio however was long puts (negative delta) to begin with, the portfolio could not be delta hedged by buying further long puts (negative delta)
Can someone tell me what the clue in the question was that could have made me interpret the question in the same way as the examiner (i.e that we are long N1 N2 N3 put options)
Thank you very much for your help
I failed ST6, no surprises there, but I have a query about the interpretation on question 3 in the paper.. i wonder if somebody could let me know why my interpretation was the opposite to the examiners
I have printed the question in full below,
Basically I assumed you were short N1, N2, N3 put option, the examiner solution assume you are long N1, N2,N3 put options
Question 3 ST6 2005
Consider a portfolio of derivatives on an equity total return index. The portfolio consists of:
N1 sold put options, strike X1 term T1
N2 sold put options, strike X2 term T2
N3 sold put options, strike X3 term T3.
Portfolio value is Vt at time T. Assme all options are adequately valued using the Black Scholes Pricing Formula
(i) Give definitions for Delta Gamma Theta Rho of portfolio
(ii) Derive formulae for Delta and Gamma of portfolio given current index value So
(iii) Describe what would happen to value of Delta if index were to fall by 50%.
(iv) Discuss the relative merits of seeking portfolio insurance by purchasing a put option from a third party, as opposed to pursuing a dynamic hedging strategy.
EXAMINER SOLUTION: has assumed we have a long position in N1 put options, N2 put optiosn, N3 put options and Hence report says total weighted delta is negative
MY INTERPRETATIONS: At the top of question, it says the portfolio consists of Ni sold put options i=1,2,3. I took his to mean we are short N1 put options, short N2 putT options and short N3 put options - Hence I thought our positions are N1,-N2,--N3 and so total delta is hence positive for the aggregate short position in put options
( if you look at ACID paper 1 1998 Q10, it says the options are SOLD and hence associates a short position (negative sign) to the positions in that question, and hence positive delta
If you look at CID paper 2003 question 5, it says that you have sold Put options and hence associates a negative sign or short position, and the total delta of the short option position is positive)
I was even more inclined to stick with my assumptions of being short the put options because of the nature of part (iii) the portfolio holder would be worried if the market fell by 50% as he would lose out on the short puts .
Indeed in part (iv), we are asked to consider insurance by buying puts presumably (long puts) well if the portfolio in this question was short puts (positive delta) you could neutralise your position by buying long puts (negative delta) if the portfolio however was long puts (negative delta) to begin with, the portfolio could not be delta hedged by buying further long puts (negative delta)
Can someone tell me what the clue in the question was that could have made me interpret the question in the same way as the examiner (i.e that we are long N1 N2 N3 put options)
Thank you very much for your help