Cross hedging

Discussion in 'Risk Management' started by Durian, Jan 31, 2008.

  1. Durian


    Hi all,

    Would be most grateful if someone here can enlighten me on this.

    I have long several stock options from the same underlying index, and would like to use the index's futures to hedge against the deltas on the stock options due to liquidity issues, ignoring correlation for now.

    can soemone help me to work this out please.
  2. ?...............Due to liquidity issues? Is your problem really due to capital losses on your options positions and you want to "hedge" your losses with another instrument instead of taking the loss now? If so, you'll only magnify your losses by attempting to "trade around" them. Otherwise, you could attempt to match the dollar-delta-value of your options to a reasonably equivalent index option to create a hedge. Ideally, the correlation will be strong.
  3. Durian


    Nazz, can you tell me how to do teh delta to dollar value thing if for example, HSBC stock options and hedging with HSI index futures? The correlation should be very strong here. Thanks
  4. In a nutshell, the change in value of your stock options as a result of a 1% move in the underlying stocks should produce the same change in value of the index option(s) you're trading to hedge your position, assuming your underlying stocks correlate 100% to the index you're looking at.