Deltaof the OptionOptionpriceSlope = △BAStockpriceRiskManagementandFinancialInstitutions,3e,Chapter7,CopyrightJohnC.Hull20126
Delta of the Option Risk Management and Financial Institutions, 3e, Chapter 7, Copyright © John C. Hull 2012 6 Option price A B Slope = D Stock price
Delta HedgingInitially the delta of the option is 0.522The delta of the position is -52,200This means that 52.200 shares mustpurchased to create a delta neutral positionBut. if a week later delta falls to 0.458, 6.400shares must be sold to maintain deltaneutrality Tables 7.2 and 7.3 (pages 142 and 143)provide examples of how delta hedgingmight work for the option.7RiskManagementandFinancialInstitutions,3e,Chapter7,CopyrightJohnC.Hull2012
Delta Hedging ⚫ Initially the delta of the option is 0.522 ⚫ The delta of the position is -52,200 ⚫ This means that 52,200 shares must purchased to create a delta neutral position ⚫ But, if a week later delta falls to 0.458, 6,400 shares must be sold to maintain delta neutrality ⚫ Tables 7.2 and 7.3 (pages 142 and 143) provide examples of how delta hedging might work for the option. Risk Management and Financial Institutions, 3e, Chapter 7, Copyright © John C. Hull 2012 7
Table 7.2: Option closes in themoneyWeekDeltaSharesStockPricePurchased049.000.52252,200148.120.458(6,400)20.40047.37(5,800)350.250.59619,600191.00055.871,0000201.00057.258RiskManagementandFinancialInstitutions,3e,Chapter7,CopyrightJohnC.Hull2012
Table 7.2: Option closes in the money Risk Management and Financial Institutions, 3e, Chapter 7, Copyright © John C. Hull 2012 8 Week Stock Price Delta Shares Purchased 0 49.00 0.522 52,200 1 48.12 0.458 (6,400) 2 47.37 0.400 (5,800) 3 50.25 0.596 19,600 . . . . 19 55.87 1.000 1,000 20 57.25 1.000 0