Hello, Went over the hdgiong portion of book 4 (schweser), and I have a q about the delta. In the examples, they are using puts, and I get that the delta of a put is always negative. Why do they divide it by neg 1? ex delta is -.87, amt to hedge is 1000000, size of contract is 62500 so, to figure out the contracts needed, you’d… (-1 / -.87) * (1,000,000 / 62,500) why the negative 1 in the numerator? what do we do if we are given calls? the delta woudl be positive, and i guess no negative 1 in the numerator? Thanks
because you want the opposite of the position you are hedging! So if you were using calls you would still use the negative numerator so that you would end up selling calls.
chrismaths Wrote: ------------------------------------------------------- > because you want the opposite of the position you > are hedging! > > So if you were using calls you would still use the > negative numerator so that you would end up > selling calls. He isn’t asking about calls. His question was about puts, and hedging a short put requires taking a short position in the underlying. It appears to me they are just doing it to give an absolute value for the number of contracts…i.e. don’t read too much into it.