Monday, March 24, 2008

American Stock Exchange and Delta Hedging

If you have ever taken a derivatives class (or even in some upper level corporate or investment classes) you probably are familiar with the "Greeks" and in particular Delta which is the change in value given a small change in the underlying asset price.

Interestingly, the American Stock Exchange now wants to allow Delta Hedging to be used more freely in offsetting option risks.

Self-Regulatory Organizations; American Stock Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Create a Delta Hedging Exemption From Equity Options Position Lim: "
"The exemptions for hedged positions generally require a one-to-one hedge (i.e., one stock option contract must be hedged by the number of shares covered by the options contract, typically 100 shares). In practice, however, many firms do not hedge their options positions in this way. Rather, these firms engage in what is known as 'delta hedging,' which varies the number of shares of the underlying security used to hedge an options position based upon the relative sensitivity of the value of the option contract to a change in the price of the underlying security. /7/ The Amex believes that delta hedging is widely accepted for net capital and risk management purposes."

1 comment:

gatorbrit said...

Interesting post. I am surprised that delta hedging wasn't the norm.