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Delta hedge

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Definition of Delta hedge

Delta Hedge Image 1

Delta hedge

A dynamic hedging strategy using options with continuous adjustment of the number of options
used, as a function of the delta of the option.



Related Terms:

Hedge ratio (delta)

The ratio of volatility of the portfolio to be hedged and the return of the volatility of the
hedging instrument.


Additional hedge

A protection against borrower fallout risk in the mortgage pipeline.


Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies


Delta

Also called the hedge ratio, the ratio of the change in price of a call option to the change in price of the
underlying stock.


Delta

The rate of change of the price of a derivative security relative to the
price of the underlying asset; i.e., the first derivative of the curve that relates
the price of the derivative to the price of the underlying security.



Delta neutral

The value of the portfolio is not affected by changes in the value of the asset on which the
options are written.


Hedge

A transaction that reduces the risk of an investment.


Delta Hedge Image 2

Hedge

A securities transaction that reduces or offsets the risk on an existing
investment position.


Hedge fund

A fund that may employ a variety of techniques to enhance returns, such as both buying and
shorting stocks based on a valuation model.


Hedge inventory

Excess inventories kept on hand as a buffer against contingent
events.


Hedged portfolio

A portfolio consisting of the long position in the stock and the short position in the call
option, so as to be riskless and produce a return that equals the risk-free interest rate.


Long hedge

The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used
by processors or exporters as protection against an advance in the cash price. Related: hedge, short hedge


Money market hedge

The use of borrowing and lending transactions in foreign currencies to lock in the
home currency value of a foreign currency transaction.


Perfect hedge

A financial result in which the profit and loss from the underlying asset and the hedge position
are equal.


Sell hedge

Related: short hedge.


Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: Long hedge.



 

 

 

 

 

 

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