1. Explain how a stop-loss trading rule can be implemented for the writer of an out-of-themoney call option. Why does it provide a relatively poor hedge?
2. What does it mean to assert that the delta of a call option is 0.7? How can a short position in 1,000 options be made delta neutral when the delta of each option is 0.7?
3. Calculate the delta of an at-the-money six-month European call option on a nondividend-paying stock when the risk-free interest rate is 10% per annum and the stock price volatility is 25% per annum.