Question 11 5 pts (TCO F) What happens to delta as expiration is approached for

ID: 2785583 • Letter: Q

Question

Question 11 5 pts (TCO F) What happens to delta as expiration is approached for options that are near the money? It remains stable. It tends to rise. It tends to change more suddenly. It becomes fixed. Question 12 5 pts (TCO G) A perfect futures market means that _______. there are no transaction costs there are no restrictions to contracts between two parties arbitrage possibilities don't exist All of the above Question 13 5 pts (TCO G) The Dow Jones Industrial Average is ______. the market capitalization weighted the price weighted the geometric average the nonweighted arithmetic average Question 14 5 pts (TCO G) When using stock index futures to hedge a portfolio of stocks, one way to improve the results of the hedge is to account for _______. the difference in volatility of the portfolio and the futures contract the difference in expected returns of the portfolio and the futures contract the difference in trading volume of the portfolio and the futures contract None of the above Question 15 5 pts (TCO F) What happens to gamma as expiration is approached for options that are far out of the money? It remains stable. It tends to rise. It can change dramatically. It approaches zero.I need an expert to answer these question asap!!

Explanation / Answer

Q = Question

Q 11.

Delta = Hedge Ratio

Delta = Change in option price / change in asset price

Call delta has a valid values ranging from zero to positive unity

Put delta has a valid values ranging from zero to negative unity

If the call option is in the money, they reach a delta of positive unity but the put options reach delta of negative unity

Put delta = call delta - 1

So, choice b) It tends to rise

Treating near the money as in the money, the delta pertaining to the in the money (ITM) option will rise as it approaches the expiry

Q 12.

Futures market helps the suppliers of the raw materials and the manufacturers of the finished goods to escape the ill effects of the volatile nature of the market.

An investor comes in between the suppliers and the manufacturer. The investor either suffers the loss of the volatile market or enjoys the profit due to the volatile market;

Say there is a farmer who grows wheat in his farm. He sells it at $1 per kilo to a baker; the baker makes 5 loafs of bread and sells them at $2 per loaf - hence the baker sells the same 1 kilo wheat for $10 after converting them into 5 loaves of bread;

They fix these rates; If the price of the wheat falls below, $1, say it falls to 60 cents, then the investor will pay the difference of 40 cents to the wheat farmer; But if the wheat price raise to $1.50, the investor will keep the profit of 50 cents per kilo traded;

Likewise, on the baker side, when the wheat rises to $1.50, the investor puts in that extra 50 cents so that the baker can buy the wheat for the same fixed rate $1 per kilo; If the wheat had fallen to 60 cents, the baker will still pay the same $1 per kilo and the investor enjoys the profit of 40 cents per kilo;

Market price

Farmers price

Investor position

Bakers price

60 cents

40 cents profit from Baker and pays it to the Farmer

$1.50

50 cents loss to the investor - buys it for $1.50 and sells it for $1

So, when the futures market is perfect, then the current price acts as one of the best available estimates of the predicted future price for the information available on hand.

Q 13.

Choice b) Dow Jones is a price weighted index average of around 30 companies;

We add the share price of all these 30 member companies and divide the sum by 30

Q 14.

choice a) to account for the difference in volatility of the portfolio and the futures contract

Hedge is a protective mechanism for the portfolio against market risks and losses and sudden and adverse fluctuations in the market

Q 15.

Gamma:

Gamma measures the change rate in the delta;

Gamma is written out as a %;

Gamma represents the change in delta as a result of fluctuations in the stock prices lying beneath;

Gamma is at the highest value when the stock price approaches the strike price; Gamma decreases to zero when the option moves out of the money;

so, choice d) it approaches zero