Baran

 

AIM 9: Explain how to implement and maintain a gamma-neutral position.

1、Gamma-neutral hedging:

A) increases sensitivity to small changes in asset prices.

B) decreases sensitivity to small changes in asset prices. 

C) increases sensitivity to large changes in asset prices.

D) decreases sensitivity to large changes in asset prices. 

Baran

 

The correct answer is D

 

Gamma-neutral hedging is designed to mitigate the effect of large changes in asset prices on delta-neutral positions that are designed to protect against small changes in asset prices.

Baran

 

2、Which of the following is least accurate regarding a gamma hedge?

A) More frequent rebalancing of a gamma hedge should result in higher returns.

B) Gamma hedges require less frequent rebalancing than delta hedges.

C) The gamma increases with larger changes in the stock price.

D) Gamma measures the change in delta.

Baran

 

 The correct answer is A

 

Gamma measures the change in delta. Gamma becomes larger as the changes in stock price increase in absolute value. Gamma hedging requires less frequent rebalancing than delta hedging. Less frequent rebalancing in a gamma hedge can result in higher returns but also increases the position’s volatility.