MGT435 2021/22
Assignment 5: Automated Delta Hedging

The purpose of this assignment is for you to develop a delta hedging strategy for the trading of
the call options from case H3. Your two overarching goals are:
• To maintain the required |hedge ratio|<3,000 and
• Hedge in a cost-effective manner.

Specifically, the case provides a firm goal for your hedge ratio. However, the bounds are wide
and so you have some leeway in choosing the frequency with which you rejig your position.
Frequent hedging is expensive and so your job is to find a working trade-off; we will do this very
coarsely (point 3d). Due to the inherent non-randomness, I will run 5 versions of the case on ports
5-9 so you can better assess the costs and benefits of your strategy.

As in previous assignments, take the following steps.

1. Verbally describe the strategy that you want to implement (you can use your journal).
Time: 10 minutes

2. Produce a flow diagram of the different steps in your algorithm. Carefully describe
which parts you implement with VBA, and which parts draw upon RTD functions (if at
all). (Note: the are always several ways how to obtain the same result; for instance, you
can do most of the code with RTD and VBA, but you can also do everything with VBA.)
Time: 30 minutes.

3. Your code + spread sheet will have different components that I’d like you to produce:

a. You will need a decision rule for buy and sell orders (you need to submit both).
You may base decision on inputs from RTD functions (but you can also obtain
information directly from RIT into VBA).
Time: 15 minutes

b. You need to decide on a dynamic strategy of cancelling and newly submitting
orders. A tricky part will be to react when you receive fills and to not over-submit
orders (there are limits)
Time: 30 minutes.

c. Develop a code that can run by itself. Collect evidence that it runs correctly.
Time: 15 minutes.

d. Experiment with different target hedge ratios (e.g., |100|, |500|, |1500|).
Which one lead to the best cost/benefit trade-off? 60-90 minutes

Overall, you need to budget about 5 hours for this assignment.