Case & Hedging Examples

1 / 9

# Case & Hedging Examples - PowerPoint PPT Presentation

Case &amp; Hedging Examples. Delta – Neutral. Consider our strategy of a long Straddle: A long Put and a long Call, both at the same exercise price. What we are interested in is the Stock price movement, either way, and with symmetric returns. Case: Pine Street Capital.

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about 'Case & Hedging Examples' - axl

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

### Case &Hedging Examples

Delta – Neutral
• Consider our strategy of a long Straddle:
• A long Put and a long Call, both at the same exercise price.
• What we are interested in is the Stock price movement, either way, and with symmetric returns.
Case: Pine Street Capital
• Hedge Fund (HF) vs Mutual Fund (MF)
• “Market-Neutral”/Positive-Alpha
• “Market-Neutral” as a Simple Hedge:
• Short the “Market”
• Put the “Market”
• Intel at \$20, with riskless rate at 3% and time to maturity of 3 months. Volatility for Intel is 35%.
• Calls (w/ X=20) at \$1.47
• Puts (w/ X=20) at \$1.32
• Buy 10 calls and 10 puts
• Cost = (10 * \$1.47 * 100) + (10 * \$1.32 * 100)
• Cost = 2790
• Intel  \$22, C = \$2.78, P = \$0.63
• Value = (10 * 2.78 * 100) + (10 * .63 * 100)
• Value = \$3410
• Gain = \$620
• Intel  \$18, C = \$0.59, P = \$2.45
• Value = (10 * 0.59 * 100) + (10 * 2.45 * 100)
• Value = \$3040
• Gain = \$250
• More Gain to upside so actually BULLISH!
Delta - Neutral
• Delta of Call is 0.5519
• Delta of Put is -0.4481
• Note: Position Delta =

(10*100*.5519) + (10*100* -0.4481) = +103.72  BULLISH!

• Delta Ratio is:

0.4481 / 0.5519 = 0.812

which means we will need .812 calls to each put (or 8 calls and 10 puts).

• Buy 8 calls and 10 puts
• Cost = (8 * \$1.47 * 100) + (10 * \$1.32 * 100)
• Cost = 2496

Note: Position Delta =

(8*100*.5519) + (10*100* -0.4481) = -6.65  Roughly Neutral