The greek letters Chapter 14 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 14.1 The Greek Letters Chapter 14
14.2 Example a bank has sold for $300,000 a European call option on 100,000 shares of a nondividend paying stock S=49,K=50,r=5%,o=20%, T=20 Weeks, u=13% The black-Scholes value of the option is $240,000 How does the bank hedge its risk to lock in a $60,000 profit? Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 14.2 Example • A bank has sold for $300,000 a European call option on 100,000 shares of a nondividend paying stock • S0 = 49, K = 50, r = 5%, s = 20%, T = 20 weeks, m = 13% • The Black-Scholes value of the option is $240,000 • How does the bank hedge its risk to lock in a $60,000 profit?
14.3 Naked covered positions Naked position Take no action Covered position Buy 100,000 shares today Both strategies leave the bank exposed to significant risk Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 14.3 Naked & Covered Positions Naked position Take no action Covered position Buy 100,000 shares today Both strategies leave the bank exposed to significant risk
14.4 Stop-LosS Strategy This involves Buying 100,000 shares as soon as price reaches $50 Selling 100,000 shares as soon as price falls below $50 This deceptively simple hedging strategy does not work well Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 14.4 Stop-Loss Strategy This involves: • Buying 100,000 shares as soon as price reaches $50 • Selling 100,000 shares as soon as price falls below $50 This deceptively simple hedging strategy does not work well
Delta(See Figure 14.2, page 302) Delta(A)is the rate of change of the option price with respect to the underlying Option price S|ope=△ a Stock price Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 14.5 Delta (See Figure 14.2, page 302) • Delta (D) is the rate of change of the option price with respect to the underlying Option price A B Slope = D Stock price