How do I solve the following? Nero Drilling stock sells for $20 a share. The ann

Question

How do I solve the following?

Nero Drilling stock sells for $20 a share. The annual interest rate is 5%, and the annual standard deviation on Nero Drilling stock is 60%. The time to expiration of all options is 6 months. You are short 100 call options on Nero with a strike price of 15. To hedge you position, you can buy or sell Nero Drilling stock, or put options on Nero Drilling at the money. Given all this:

A: Derive the position you will take if you want to delta hedge your position.  

B: Derive the position you will take if you want to delta-gamma hedge your position

Explanation / Answer

Answer:

A.In delta has we offset the positions. Here we are given that You are short 100 call options on Nero, hence to do a delta hedge we need to have long position in Nero.

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