A Trader Uses a Stop-Loss Strategy to Hedge a Short

question 2

Short Answer

A trader uses a stop-loss strategy to hedge a short position in a three-month call option with a strike price of 0.7000 on an exchange rate. The trader covers the option when the exchange rate is 0.7005 and assumes a naked position when the exchange rate is 0.6995. The value of the option is 0.1. Estimate the expected number of times the trader covers the position during the life of the option. _ _ _ _ _ _

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Definitions:

Cones

Photoreceptor cells in the retina of the eye that function best in bright light and enable color vision.

Blind Spot

An area in the visual field that lacks detection due to the absence of photoreceptor cells in the optic disc of the retina.

Brain

The organ in the head of an organism that controls its actions, thoughts, feelings, and interactions with the environment.

Fovea

A small depression in the retina of the eye where visual acuity is highest, due to the concentration of cones.