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Delta Hedging |
Also found in: Wikipedia | 0.04 sec. |
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Delta Hedging An options strategy that aims to reduce (hedge) the risk associated with price movements in the underlying asset by offsetting long and short positions. For example, a long call position may be delta hedged by shorting the underlying stock. This strategy is based on the change in premium (price of option) caused by a change in the price of the underlying security. The change in premium for each basis-point change in price of the underlying is the delta and the relationship between the two movements is the hedge ratio. Notes: For example, the price of a call option with a hedge ratio of 40 will rise 40% (of the stock-price move) if the price of the underlying stock increases. Typically, options with high hedge ratios are usually more profitable to buy rather than write since the greater the percentage movement - relative to the underlying's price and the corresponding little time-value erosion - the greater the leverage. The opposite is true for options with a low hedge ratio. |
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? Mentioned in | ? References in periodicals archive | |
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This is needed because the options bought for Delta hedging have durations shorter than the duration of the underlying variable-annuity guarantee liabilities. The book also discusses the latest ideas surrounding finance like the robustness of dynamic delta hedging, option hedging, negative probabilities and space-time finance. The growth of single-tranche synthetic CDOs has been made possible through the development of delta hedging or correlation techniques, which allow the arranging banks to hedge the remaining risk (in our example, $90 million). |
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