For example, we have an exposure to 1000 EUR bonds, and chose to hedge the positon with put option with contract size of 200 and delta of -0.5.
The number of options needed = 1000 / 200 * 0.5 = 10.
But when I go through the CFAI materials, I cannot find a formula related to the above question, but just a formula about delta hedging as below:
Number of options issued to be hedged = Number of stock shares to hedge * Option Delta
Am I missing something here?
get hold of the series 3 study material. compared with cfai it’s night & day.
Where do you see that formula in the curriculum?
If you’re trying to hedge a stock position with options, it should be:
Number of options = number of shares of stock ÷ option delta
I think Roccolee should have written this
The number of options needed = 1000 / 200 * 0.5 = 10.
as
The number of options needed = 1000 / (200 * 0.5) = 10.
which is the same as S2000’s formula
(1000/200) / 0.5 = 5/0.5 = 10