Currency option delta as hedge for acct

J

jj90

For hedging exchange rate risk using futures, would one need a direct amount equivalent to the currency futures or would the futures option be sufficient to hedge an amount less then that? I'm aware the currency futures at the CME go in 100k amounts, exception being euro, but my acct is less than the mini contract for that. Am I right to believe that if I had say a 40k USD acct, the proper hedge for that is then the appropriate option with a delta for 40? If so, would it then act as a substitute for the future, where whatever I lose on the option is gained by my acct and vice versa?
 
If your account is 40K then you have 40K deltas and need an option position with -40K deltas. It doesn't necessarily have to be an option with 0.4 delta, you can have whatever option you like as long as the total option position delta is 40K.

Delta-hedging can get expensive though as you need to constantly rebalance the hedge. Futures are lot easier in this regard.
 
I understand, but isn't the delta hedge off with the futures either? To hedge 40k USD with a 100k future gives me 60k worth of exchange rate exposure no? Or does it not work like that.
 
Yes, that is correct, in your case you can't use futures as you would overhedge. I was just pointing out the simplicity of futures.
 
Any suggestions on other products to hedge exchange rate risk? I'm going to my local bank to check out what they have for fowards.
 
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