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Hello Sir,
In the Uniglow question, I did not understand how the examiner read the normal distribution (N) of the d1 value. i.e the N(d1). The examiner read it as -0.0778. But I think it should have been read as -0.0753.
I tried to understand his answer(-0.0778), but I could not even find his answer in the standard normal distribution table.
I may possibly be missing out on something. Please kindly assist me
Thanks in advance.
The value for 0.19 from the tables is 0.0753.
The value for 0.20 from the tables is 0.0793.Since 0.19624 is between 0.19 and 0.20, the examiner has approximated between the two results and got 0.0753 + 0.00624(0.0793 – 0.0753) = 0.0778.
Hi John,
On this Q, if you have a copy of it to hand, is it trying to trick us in to thinking we need to delta hedge using call options when what we really need are put options? As if we already own the underlying asset (the shares) and we are worried of their price dropping, we want to lock-in gain from intrinsic value of put options if prices do decrease, so it’s delta hedge using put options we need? But then the q only gives an exercise price of a call option.. so I’m confused. I don’t have a solution to the q to check it (only found a copy of the q online)..Thanks
Cathal
Delta hedges are normally created using call options and I explain why in my free lectures (it is because in practice it is the option dealer who will be wanting to create a delta hedge).
If an exam question wanted you to use put options then it would say so, but in this question there are only call options available.
(I hope you are not making a habit of just downloading past exam questions – especially if you have not got the answers!! The examiner, the syllabus, and the format of the exam have changed over the years and so it really is essential that you use a Revision Kit from one of the ACCA approved publishers.)
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