Asked by Brittany Orozco on May 22, 2024
Verified
Options sellers who are delta-hedging would most likely
A) sell when markets are falling.
B) buy when markets are rising.
C) sell when markets are falling and buy when markets are rising.
D) sell whether markets are falling or rising.
E) buy whether markets are falling or rising.
Delta-hedging
A strategy used in options trading to reduce the risk of price movements of the underlying asset by offsetting positions.
Options Sellers
Parties in an options contract who take on the obligation to buy or sell the underlying asset if the options buyer exercises their right.
Markets
Platforms or systems where buyers and sellers interact to trade goods, services, securities, or other assets.
- Gain an understanding of the strategies behind dynamic hedging and its difficulties within unstable market conditions.
- Describe the principle of the hedge ratio and detail the computation methods for it with respect to different options.
Verified Answer
TD
Tyrone DixonMay 24, 2024
Final Answer :
C
Explanation :
Delta-hedging involves adjusting a position to maintain a delta-neutral portfolio. When the market falls, the delta of a short option position becomes more positive (or less negative), prompting the seller to sell to rebalance. Conversely, when the market rises, the delta becomes more negative (or less positive), leading the seller to buy to maintain neutrality.
Learning Objectives
- Gain an understanding of the strategies behind dynamic hedging and its difficulties within unstable market conditions.
- Describe the principle of the hedge ratio and detail the computation methods for it with respect to different options.