Chapter 05 · Section 5.1

Comparing Delta Hedging to Fixed Hedging

A Fixed Hedge (also called a simple hedge):

-covers the full face value of the hedged position at a one-to-one relationship.

Example: You are short 125,000 DM for December and hedge it by buying one CME December futures call option.(Contract size DM 125,000)

With a Delta Hedge (also called a ratio hedge): -the delta factor is used to weight the options hedge.

                   Fixed hedge            Delta hedge 

                  At one-to-one           An amount weighted by 
Covers            relationship            the delta factor