Options and Delta Hedging

  1. Options and Delta Hedging (10 points)

You own 1000 shares and you want to protect yourself against a potential drop in market prices. Build an at-the-
money (or near-the-money next available expiry date) delta hedge for your stock position (option details with screenshot, quantity, total cost). Is your hedge perfect?

Your stock:

  1. Dirty bond quote (10 points)

Provide a clean quote (price and screenshot of quote) and a dirty quote for this bond (try
www.bondsupermart.com for data).

Your bond:
MICROSOFT – MSFT 2.400% 08Aug2026 Corp (USD)

  1. Futures contracts: margins (10 points)

You bought some futures contracts (details below) one week ago. Today’s closing price is also detailed below.
Calculate the balance of your margin account. Will you get a margin call? Do you need to add funds to your margin? If so, how much? Show your calculations.

  1. Hedging with Futures (20 points)

You are the administrator of an oil-drilling platform with a monthly production of 300,000 barrels of light sweet crude (WTI). The board of directors wants a steady and predictable income (not subject to market fluctuations) for the month of June 2021. What can you do? Determine the specific financial product to use, the quantities required and the locked-in price and any other information you judge relevant to prove you hedged production.

Your proposal must include the two following sections details of a potential hedge using live futures contracts (how many, which contracts, delivery date, etc.) the total cost (if any). Include a screenshot of the quote.

  1. Option strategy (10 points)

Draw the payoff graph for the following strategy and option details:

Short straddle
Strike: $40 Call premium: $3 Put premium: $2

  1. Investments (10 points)

You have inherited $100,000 and you want to invest it for your retirement. Assume you have no other assets except this amount. Where are you going to invest? Provide specific amounts, financial assets (name, quote, etc.) and reason for choosing those assets/portfolio weights.

  1. Options valuation (15)

Use the Black Scholes model to calculate the value of a near-the-money put and call for the stock below.
Compare your answer with the market premiums and provide an opinion!

Your stock:

  1. Bond default (15)

Select a company of your choice, from the UAE. Download the latest available balance sheet and calculate the Altman Z-score for this firm. Provide a copy of the balance sheet. Interpret the score – is there a default risk for this corporation?

Sample Solution