AdvancedMultiple choice
Two stocks and a worst-of · Part 3 of 3
Two stocks each trade at $100 with 30% volatility. A one-year worst-of call pays the larger of zero and the worse-performing stock’s return. The correlation between the stocks is 0.5.
Months later one stock is at $80 and the other at $120. How should the desk that sold the worst-of call spread its delta hedge?
- ANearly all in the $80 stock, the likely laggard
- BEqually in both, since the two stocks started at the same price
- CMostly in the $120 stock, because it has the larger price and so the larger delta
- DNo hedge is needed, since the worst-of is far out of the money in both names
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