when to/not use delta of the option when calculating hedging contracts?

CFA Level III Derivatives
#1

Home currency: USD

Own Euro-denominated bond.

Want to hedge currency risk by purchasing ATM put (Delta 0.5).

Portfolio size is Euro 1B, Contract size is Euro 100K.

Is the contract # 1B/100K = 10K or

10K/0.5 = 20K?

Answer key is 10K.

Why is the delta not considered here?

#2

Delta is not considered because you arent delta hedging… You’re just hedging traditional method using a protective put, and being a .5 delta, its at at the money put.

Delta hedging is a technique to use options to hedge the long or short position based on the price movement of the option versus the price movement of the underlying, and keeping them moving together by offsetting them so that your gains and losses cancel out

#3

With the bond hedge, you are basically guaranteeing a dollar sale price for that bond. You are “locking in” a floor for the Euros that you will sell and convert back to dollars. Focus here is on the $, not matching the deltas. You don’t care what happens to the price of the option or the price of the underlying, because you’re locked in. Agree with what 125mph said above.

#4

Thanks a lot!