I have the Actuarial Brew practice exams (2015 version) and have a couple of questions about problems on the first one.
#17: I thought I understood this one, but why does the gamma remain positive? The gamma for the call options is positive, but the market maker is selling them. The formula shown in the solution is the same as that on page 431 of Derivatives Markets for the return on a delta-hedged position in which the market maker buys call options (although the formula shown in DM has both sides negated). Compare this to #7, in which put options have a positive gamma but since we're selling them, the gamma for the position is negative.
#30: Quite simply, why is the S(t)^3 part of theta 0? I understand the rest of the problem, but not this, and the solution doesn't explain the reasoning behind it.
In both cases, it feels as if I'm overlooking something simple. Any insight into these problems would be appreciated. If either of these questions has been posted elsewhere and answered, I apologize, but I tried using the search function and it kept giving me a blank screen.
#17: I thought I understood this one, but why does the gamma remain positive? The gamma for the call options is positive, but the market maker is selling them. The formula shown in the solution is the same as that on page 431 of Derivatives Markets for the return on a delta-hedged position in which the market maker buys call options (although the formula shown in DM has both sides negated). Compare this to #7, in which put options have a positive gamma but since we're selling them, the gamma for the position is negative.
#30: Quite simply, why is the S(t)^3 part of theta 0? I understand the rest of the problem, but not this, and the solution doesn't explain the reasoning behind it.
In both cases, it feels as if I'm overlooking something simple. Any insight into these problems would be appreciated. If either of these questions has been posted elsewhere and answered, I apologize, but I tried using the search function and it kept giving me a blank screen.
Actuarial Brew Practice Exam 1 Questions
