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Lecture 11 – The Greek Letters and Exotic Options
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Lecture 11 – The Greek Letters and Exotic Options

FINC3012 - Derivative Securities

6 Pages University of Sydney Partial Study Notes Year: Pre-2017

Lecture 11 – The Greek Letters and Exotic Options 1. THE GREEK LETTERS: 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%, σ=20%, T = 20 weeks, μ = 13% • The Black-Scholes value of the option is $240,000 • How does the bank hedge its risk? Naked and Covered Positions: • Naked Position o Take no action • Covered Position o Buy 100,000 shares today • Both strategies leave the bank exposed to significant risk Stop-Loss Strategy: • This involves: o Buying 100,000 shares as soon as price reaches $50 o Selling 100,000 shares as soon as price falls below $50 
 • This deceptively simple hedging strategy does not work well Delta (Δ): • The rate of change of the option price with respect to the underlying

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