Hedge Ratio Formula Question
Date: June 2, 2010 12:26PM
Are there two ways to compute the hedge ratio?
2) C+ - C- / S+ - S-
is that correct?
Date: June 2, 2010 12:27PM
i believe 2 is calculating delta to use for 1
Date: June 2, 2010 12:44PM
Yea, delta and the hedge ratio are the same thing.
Date: June 2, 2010 12:46PM
To put it together.
schweser sample exam, book 7 exam 1, #109
which of the following positions will best delta hedge Nolte's long position?
He owns 5,000 shares, the delta for the 1 month calls is .54
we are given the delta, and we have to compute the hedge ratio
hedge ratio tells us # of calls (per share) to short
hedge ratio = 1/delta = 1.54 = 1.851
answer: sell 9259 calls
Date: June 2, 2010 12:48PM
revisor - Isn't the effect the same?
Edited 1 time(s). Last edit at Wednesday, June 2, 2010 at 12:49PM by 2010CFACFA.
Date: June 2, 2010 12:55PM
same thing pretty much. Usually you are hedging a stock position (as opposed to hedging an option position), so the hedge ratio is shares/delta.
in your examply, stock moves up $1 you lose 85 on the stock and make 85 on the call
if i am short 85 shares in stock, i would need 85/.85 = 100 calls