Question #2
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 1
Status: Unattempted
Correct Answer: B
Question
Two call options have the same delta but option A has a higher gamma than option
Answer Choices:
A. larger positive number
B. larger (negative) number
C. smaller (negative) number
Explanation
For call options larger gamma means that as the asset price increases, the delta of option
A increases more than the delta of option B. Since the number of calls to hedge is (–
1/delta)x(number of shares), the number of calls necessary for the hedge is a smaller
(negative) number for option A than for option B.