Which of the following is true when delta, but not gamma, is used in calculating VaR for option positions?
A. VaR for a long call is too low and VaR for a long put is too low
B. VaR for a long call is too low and VaR for a long put is too high
C. VaR for a long call is too high and VaR for a long put is too low
D. VaR for a long call is too high and VaR for a long put is too high
D
When gamma is ignored, VaR for long option positions is too high and VaR for short option positions is too low. This is demonstrated for calls in Figures 22.5 and 22.6 . The same can easily be seen to be true for puts.
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