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Delta hedging
       
 
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Delta hedging

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Delta hedging
proportion to its Delta. For example, if one is Short a call Option on an Underlying with a face value of $1 million and a Delta of 25%, a Long Position of $250,000 in the Underlying Will leave one Delta-neutral with no exposure to small changes in the price of the Underlying. Such a Hedge is only effective instantaneously, however. Since the Delta of an Option is itself altered by changes in the price of the Underlying, Interest rates, the Option’s Volatility and its time to expiry, changes in any of these factors Will shift the net Position away from Delta-neutrality. In practice, therefore, a Delta-Hedge must be rebalanced continuously if it is to be effective.

See also Static replication
Posted by  Privatebanking.com
 
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