Question: You are long a call option no MITCO stock. You have delta hedged your position. You hear on the radio that the CEO of MITCO has just been arrested for running a massive Ponzi scheme. The stock price plunges $10. How do you adjust your hedge (qualitatively)? That is, do you borrow and buy stock or sell stock and lend? Explain carefully.

I know that delta is the rate of change of option's value with respect to stock price.

Since stock price decreases, so is delta.

But I do not know how to adjust the delta hedging.


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