(Answered)-A portfolio of derivatives on a stock has a delta of 2400 and a - (2025 Updated Original AI-Free Solution

Question

1. A portfolio of derivatives on a stock has a delta of 2400 and a gamma of ?100. An option on the stock with a delta of 0.6 and a gamma of 0.04 can be traded.
   1. What position in the option creates a portfolio that is gamma neutral? Give size of position and state whether it is long or short?
   2. After this position has been taken what position in the stock is then necessary for delta neutrality? Give size of position and state whether it is long or short

SOLUTION

Delta
Gamma

GIVEN:Portfolio
Option on stock
2400
0.60
-100
0.04

PART 1
Gamma neutral portfolio is created as follows:Portfolio Gamma + (Gamma of option*no of position) = 0
Let n be the...