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Dear sir,
I have watched your lecture on Share options and I would like some doubts clarified.1. In the short term apart from share price and exercise price are we assuming all other factors remain constant? Will a long term delta hedge be tested in the exam?
2. What is the significance of N(d1)? I didn’t understand that part sir
Also, In eg 5 reg delta hedges, why are we assuming that prices fall by 10 cents? Is it because of the risk free rate of return?
Thanks!
1. You are expected to know what a delta hedge is and how to create one – the lectures cover what is needed for the exam. And yes, in the short-term we assume the other factors remain constant, but (as I state int he lecture) in the longer term the delta hedge would need to be revised, but you won’t be expected to in the exam.
2. Given that other factors are issued to be constant, then N(d1) is the rate at which the option price will change as the share price changes.
I only used 10c as an example – I could have used any amount.
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