The Price of The AT&T & CBOE, Delta and Gamma Risks Associated - Accounting Assignment Help

Assignment Task-

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Question 1

See the spreadsheet “AT&T” for the actual CBOE data on AT&T equity options.
American options on AT&T stocks are traded on CBOE. Today is 05 November 2020. The last stock price was $27.04. The volatility of the AT&T stock over the next 3 months is expected to be stable at 23%.

1. a) Calculate the price of the AT&T option with the strike price of $27 that expires on 15 January 2021
2. b) Compare the price in a) with the actual quotes from CBOE. Does the market prices the option fairly? 
3. c) Calculate delta and gamma for this option. What is the difference between your calculations and the estimates provided by CBOE (in absolute terms)? 
4. d) According to these differences, does the market underestimate or overestimate delta and gamma risks associated with trading these options? 

Question2

You are making markets for corn futures options on CBOE. You will need to make several calculations applying similar computation methods as in the Akuna Options Market-Maker Simulator (which we used in the iLab class). Ignore the risk-free rate (assume that it is 0%). Apply the same scaling as in the Akuna Simulator. See the spreadsheet “Corn futures” for the data on the current corn futures price (cell B1) and your (the market maker’s) estimates of different Greeks and theoretical option prices. The spreadsheet also provides the best bid and offer prices currently quoted by other market participants (not you) at CBOE. You can trade at these prices with other market participants.

The following three questions are based on the following information.

In the middle of the day, your portfolio delta is 20.40, your portfolio cash gamma is 10,559.66, and your portfolio vega is 2,121.69. You consider the ways to make your portfolio delta-gamma neutral.

a) You will buy/sell one-strike options and buy/sell some underlying assets to neutralize your delta and gamma. The margin required to trade corn futures is 60% of the contract value. Assuming that you submit market orders and trade at the available quoted best bid and ask prices, find the cheapest way to neutralize your delta and gamma 

• Specify how many options (and with which strike price) you need to buy/sell and how manyunderlying assets you need to buy/sell

b) What is the cost of using the combination of options and underlying assets from a) for delta-gammahedging? 

c) How does your portfolio vega change after you use the combination of options and underlying assets from a)? 

• Enter the difference between the new portfolio vega and the old portfolio vega

The following two questions are based on the following information.

In the middle of the day, your portfolio consists of: 25 long call options with K=360, 10 long put option with K=360, 15 short call options with K=400, 5 long put options with K=300, 13 short put options with K=370, 5 long call options with K=370, 20 long put options with K=320, and 30 long call options with K=460. You want to make your portfolio delta- gamma-vega neutral.

d) Consider the following option stikes: 340, 350, 380, and 390. Which of these option combinations (use 2 strikes) + some position in underlying is the cheapest way to make your portfolio delta-
gamma-vega neutral? Assume that you submit market orders and trade at the available quoted best bid and ask prices.

• • Specify how many options (and with which strike price) you need to buy/sell and how many underlying assets you need to buy/sell

e) What is the hedging cost of the cheapest hedging strategy from d)? [2 points]

f) Qualitative question. What is the benefit of using option combinations compared to trading single options for market makers? Which option combinations would market makers trade more carefully than others?

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