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FI6051 Dynamic Delta Hedging Example HullTable14!2!3

This document summarizes the hedging of a call option over 20 weeks. It shows the stock price, delta, number of shares required to hedge, shares purchased or sold each week to hedge, and the cumulative cost of hedging, totaling $526,290. The option expires in the money, resulting in revenue of $5,000,000 from the short position and a net cost of hedging of $262,900.

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429 views

FI6051 Dynamic Delta Hedging Example HullTable14!2!3

This document summarizes the hedging of a call option over 20 weeks. It shows the stock price, delta, number of shares required to hedge, shares purchased or sold each week to hedge, and the cumulative cost of hedging, totaling $526,290. The option expires in the money, resulting in revenue of $5,000,000 from the short position and a net cost of hedging of $262,900.

Uploaded by

fmurphy
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Strike Price (K) 50

Risk-Free
Interest Rate (r) 0.05 ln  S / K   rσ 2 /2  T
d 1=
σ T
Option Volatility 0.2
No. Shares
Underlying Δ= N  d 1 100000×Δ
Option 100000

Shares
Required
Week Time to Maturity Stock Price d1 Delta to Hedge
0 0.3846 49.00 0.05418 0.522 52200
1 0.3654 48.12 -0.10545 0.458 45800
2 0.3462 47.37 -0.25328 0.400 40000
3 0.3269 50.25 0.24373 0.596 59600
4 0.3077 51.75 0.50424 0.693 69300
5 0.2885 53.12 0.75149 0.774 77400
6 0.2692 53.00 0.74310 0.771 77100
7 0.2500 51.87 0.54218 0.706 70600
8 0.2308 51.38 0.45151 0.674 67400
9 0.2115 53.00 0.79443 0.787 78700
10 0.1923 49.88 0.12609 0.550 55000
11 0.1731 48.50 -0.22047 0.413 41300
12 0.1538 49.88 0.10665 0.542 54200
13 0.1346 50.37 0.22889 0.591 59100
14 0.1154 52.13 0.73296 0.768 76800
15 0.0962 51.88 0.70369 0.759 75900
16 0.0769 52.87 1.10326 0.865 86500
17 0.0577 54.87 2.01885 0.978 97800
18 0.0385 54.62 2.32182 0.990 99000
19 0.0192 55.87 4.05086 1.000 100000
20 0.0000 57.25 N/A 1.000 0.000

Call option
expires ITM
σ 2 /2  T

100000×Δ

Shares Cost (Gain) on Cumulative Cost


Purchased Shares Purchased including Interest Interest cost
(Sold) (Sold) in $m in $m in $m
52200 2.5578 2.5578 0.0025
-6400 -0.3080 2.2523 0.0022
-5800 -0.2747 1.9798 0.0019
19600 0.9849 2.9666 0.0028
9700 0.5020 3.4714 0.0033
8100 0.4303 3.9050 0.0037
-300 -0.0159 3.8928 0.0037
-6500 -0.3372 3.5593 0.0034
-3200 -0.1644 3.3983 0.0032
11300 0.5989 4.0004 0.0038
-23700 -1.1822 2.8220 0.0027
-13700 -0.6645 2.1602 0.0021
12900 0.6435 2.8058 0.0027
4900 0.2468 3.0553 0.0029
17700 0.9227 3.9809 0.0038
-900 -0.0467 3.9380 0.0038
10600 0.5604 4.5022 0.0043
11300 0.6200 5.1265 0.0049
1200 0.0655 5.1969 0.0050
1000 0.0559 5.2578 0.0051
0 0.0000 5.2629
Total Cost of Hedge 5262900

Revenue from Short


(ITM) Option
Position 5000000

Net Cost of Hedged


Option Position 262900
Strike Price (K) 50
Risk-Free
Interest Rate (r) 0.05 ln  S / K   rσ 2 /2  T
d 1=
Option Volatility 0.2 σ T
No. Shares
Underlying
Δ= N  d 1 100000×Δ
Option 100000

Shares
Required
Week Time to Maturity Stock Price d1 Delta to Hedge
0 0.3846 49.00 0.05418 0.522 52200
1 0.3654 49.75 0.17010 0.568 56800
2 0.3462 52.00 0.53923 0.705 70500
3 0.3269 50.00 0.20012 0.579 57900
4 0.3077 48.38 -0.10274 0.459 45900
5 0.2885 48.25 -0.14369 0.443 44300
6 0.2692 48.75 -0.06236 0.475 47500
7 0.2500 49.63 0.10072 0.540 54000
8 0.2308 48.25 -0.20268 0.420 42000
9 0.2115 48.25 -0.22633 0.410 41000
10 0.1923 51.12 0.40607 0.658 65800
11 0.1731 51.50 0.50086 0.692 69200
12 0.1538 49.88 0.10665 0.542 54200
13 0.1346 49.88 0.09567 0.538 53800
14 0.1154 48.75 -0.25378 0.400 40000
15 0.0962 47.50 -0.71855 0.236 23600
16 0.0769 48.00 -0.63886 0.261 26100
17 0.0577 46.25 -1.53883 0.062 6200
18 0.0385 48.13 -0.90316 0.183 18300
19 0.0192 46.63 -2.46738 0.007 700
20 0.0000 48.12 N/A 0.000 0

Call option
expires OTM
σ 2 /2  T

100000× Δ

Shares Cost (Gain) on Cumulative Cost


Purchased Shares Purchased including Interest Interest cost
(Sold) (Sold) in $m in $m in $m
52200 2.5578 2.5578 0.0025
4600 0.2289 2.7892 0.0027
13700 0.7124 3.5043 0.0034
-12600 -0.6300 2.8777 0.0028
-12000 -0.5806 2.2999 0.0022
-1600 -0.0772 2.2249 0.0021
3200 0.1560 2.3830 0.0023
6500 0.3226 2.7079 0.0026
-12000 -0.5790 2.1315 0.0020
-1000 -0.0483 2.0852 0.0020
24800 1.2678 3.3550 0.0032
3400 0.1751 3.5333 0.0034
-15000 -0.7482 2.7885 0.0027
-400 -0.0200 2.7712 0.0027
-13800 -0.6728 2.1011 0.0021
-16400 -0.7790 1.3242 0.0014
2500 0.1200 1.4456 0.0015
-19900 -0.9204 0.5267 0.0006
12100 0.5824 1.1097 0.0012
-17600 -0.8207 0.2902 0.0004
-700 -0.0337 0.2569
Total Cost of Hedge 256900

Revenue from Short


(OTM) Option
Position 0

Net Cost of Hedged


Option Position 256900

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