Exam-Style Questions on Market-Making and Delta-Hedging

The Actuary's Free Study Guide for Exam 3F / Exam MFE - Section 51

This section of sample problems and solutions is a part of The Actuary's Free Study Guide for Exam 3F / Exam MFE, authored by Mr. Stolyarov.

This is Section 51 of the Study Guide. See Section 1 here. See Section 2 here. See Section 3 here. See Section 4 here. See Section 5 here. See Section 6 here. See Section 7 here. See Section 8 here. See Section 9 here. See Section 10

here. See Section 11 here. See Section 12 here. See Section 13 here. See Section 14 here. See Section 15 here. See Section 16 here. See Section 17 here. See Section 18 here. See Section 19 here. See Section 20 here. See Section 21 here. See Section 22 here. See Section 23 here. See Section 24 here. See Section 25 here. See Section 26 here. See Section 27 here. See Section 28 here. See Section 29 here. See Section 30 here. See Section 31 here. See Section 32 here. See Section 33 here. See Section 34 here. See Section 35 here. See Section 36 here. See Section 37 here. See Section 38 here. See Section 39 here. See Section 40 here. See Section 41 here. See Section 42 here. See Section 43 here. See Section 44 here. See Section 45 here. See Section 46 here. See Section 47 here. See Section 48 here. See Section 49 here. See Section 50 here.

Note 51.1: Before, we solve the exam-style questions on market-making and delta-hedging, one additional formula is in order. Within the Black-Scholes framework, if a delta-hedged market-maker makes exactly zero profit during a specific time period, it can be assumed that a stock price moved by one standard deviation during that period. That is, the magnitude of the move will be σS_t√(h), where t is the time at which the original stock price existed, S_t is the stock price, h is the time period during which the stock price moves, and σ is the annual standard deviation of the stock price movement.