Which of the following best explains a delta-neutral portfolio? A delta-neutral portfolio
is perfectly hedged against: (LO 16-5)
a. Small price changes in the underlying asset.
b. Small price decreases in the underlying asset.
c. All price changes in the underlying asset.
11. After discussing the concept of a delta-neutral portfolio, Washington determines that he
needs to further explain the concept of delta. Washington draws the value of an option
as a function of the underlying stock price. Draw such a diagram, and indicate how delta
is interpreted. Delta is the: (LO 16-5)
a. Slope in the option price diagram.
b. Curvature of the option price graph.
c. Level in the option price diagram.
12. Washington considers a put option that has a delta of 2 .65. If the price of the underlying
asset decreases by $6, then what is the best estimate of the change in option
price?
28. According to the Black-Scholes formula, what will be the value of the hedge ratio of a
put option for a very small exercise price?
