hard · Quantitative Finance
A volatility trader sells an option with an implied volatility of 25%. Over the life of the trade, the trader maintains a delta-neutral hedge.
If the realized volatility of the underlying asset is consistently 20%, what is the likely outcome for the trader's total P&L?
- The trader breaks even because delta-neutral rebalancing neutralizes all volatility risk.
- The trader realizes a profit because the time decay collected exceeded the losses from gamma rebalancing.
- The P&L is determined solely by the final spot price relative to the strike price.
- The trader loses money because the realized moves were not large enough to justify the delta hedge costs.
Sign up free to see the explanation and track your rank →
More Quantitative Finance practice
- If the underlying stock price S moves by +$2.00 over a very short interval, what is the es
- What is the estimated OLS slope hatβ?
- If the flat yield curve is at 4% (continuously compounded), what is the bond's price?
- As the number of assets n approaches infinity, what happens to the total portfolio varianc
- What is the fair no-arbitrage price for a six-month (T = 0.5) forward contract?
- If the risk-neutral probability of an up move is p = 0.6 and the risk-free rate is zero, w
- When pricing a 'Digital' (or Binary) call option near expiry with the spot price very clos
- Calculate the price of a zero-coupon bond that pays $1000 in two years, given that the one