FX options: forward hedge and delta exchange witsh client

jackhmc · February 16th, 2008, 11:39 am

Hi,I was interning at a FX options desk (market making) last summer. Two quick questions:1) When do you use forward hedge for a delta neutral trade? Why forward hedge with uncertainties when spot hedge is available?2) I always heard of the phrase "delta exchange with client." Does it mean if you sell a 25 delta call and "delta exchange" with your client, you simultaneously buy 25 of the underlying from your client?A newbie here. Thanks a lot!

pcg · February 18th, 2008, 3:47 am

In a option there are three risks which can be covered in the FX spt/fwd market.These are spot price risk , local ccy interest rate risk and fioreign ccy risk... if the option is long dated > 1 year or so , one would be able to achieve a complete hedge by doing a forward delta cover but depending on market liquidity one can also do spot and interest rate seperately.... so if one gets a better liquidity via swap markets one can hedge the IR risk there and spot seperately

pcg · February 18th, 2008, 3:47 am

In a option there are three risks which can be covered in the FX spt/fwd market.These are spot price risk , local ccy interest rate risk and fioreign ccy risk... if the option is long dated > 1 year or so , one would be able to achieve a complete hedge by doing a forward delta cover but depending on market liquidity one can also do spot and interest rate seperately.... so if one gets a better liquidity via swap markets one can hedge the IR risk there and spot seperately

jackhmc · February 18th, 2008, 5:17 am

Thanks a lot pcg!!!!!1) So do you mean forward hedge is always the more convenient way to do delta hedge as if you do spot hedge you need to also do IR hedge.2) Do you know what "delta exchange" mean? Would it be a forward trade in this case?Thanks again!

tricky69 · March 14th, 2008, 7:27 am

Delta exchange is a simple agreement between the counterparties to do exactly that.. to exchange the delta at barrier. Mostly used on exotic options it is a way to get rid of the spot risk by agreeing to trade the spot hedge out again, therefore not taking on a spot position

pcg · May 19th, 2008, 1:42 pm

typically delta exchange is done when markets are very volatile and you may not hence get the same spot reference .. tat is for interbank.. for client trades, not sure if ever done ..because clients will typically do options to hedge some spot /fwd exposure