Delta Hedging

Question 1

What are the three components of overnight profit?

Answer 1

1. Gain on Stocks
2. Gain on Options
3. Interest on borrowed/lent money

Question 2

What is the price movement at which the delta-hedger breaks even?

Answer 2

±Sσ√(h)

Question 3

Under the delta-gamma-theta approximation,

V_t+h =

Answer 3

V_t+h = V_t + Δ_tε + 0.5Γ_tε² + θ_th

Question 4

Boyle-Emanuel periodic variance of return when rehedging every h in period i

Answer 4

Var[R_h,i] = 0.5(S²σ²Γh)²

Question 5

Boyle-Emanuel annual variance of return when rehedging every h in period i

Answer 5

Var[R_h,i] = 0.5(S²σ²Γ)²•h