Hi, I just like to check that if I am trying to delta hedge an APO eg max (S(Ave) - K,0), where the S(Ave) is the daily settles based on the futures. And there are futures and swaps available. Swaps as priced basis futures settlement prices...Which do I use for delta hedging? The futures or the swaps?Can I use either?And regardless of the underlying I use for delta hedging, the APO delta at expiry is always 0, right?The other question I have is regarding an APO call. Suppose I am long an APO call and I delta hedge the initial delta eg sell 100 lots.Thereafter, the price keeps trending up and my delta gets smaller towards expiry. Then I would be buying as the price increases - wouldn't I lose money on delta hedging then?This seems counter-intuitive since I paid a premium for the APO and I am still losing money on the delta hedging.Sorry for the barrage of questions. And thanks in advance for looking/replying!

you can use futures or swaps but you'll save yourself headaches if you use swaps in the long run...QuoteOriginally posted by: HBHBHi, I just like to check that if I am trying to delta hedge an APO eg max (S(Ave) - K,0), where the S(Ave) is the daily settles based on the futures. And there are futures and swaps available. Swaps as priced basis futures settlement prices...Which do I use for delta hedging? The futures or the swaps?Can I use either?And regardless of the underlying I use for delta hedging, the APO delta at expiry is always 0, right?The other question I have is regarding an APO call. Suppose I am long an APO call and I delta hedge the initial delta eg sell 100 lots.Thereafter, the price keeps trending up and my delta gets smaller towards expiry. Then I would be buying as the price increases - wouldn't I lose money on delta hedging then?This seems counter-intuitive since I paid a premium for the APO and I am still losing money on the delta hedging.Sorry for the barrage of questions. And thanks in advance for looking/replying!

Hi tw, thanks for the reply!But, isn't it easier to use futures? For futures, the delta is one. Whilst for the swaps, when it comes to pricing/fixings, the swaps are no longer delta one?

Hi HBHB Sorry: I didn't see your followup question till now.What I was getting at was, at least for APOs such as in crude oil, at each closing price you will effectively lose volume and will have to rebalance your futures position on a daily basis (ideally trading TAS or equivalent). However if you hedge with a swap, this will have similar (but not exactly equal and opposite)properties, considerably reducing the rebalancing you need to do in delivery.QuoteOriginally posted by: HBHBHi tw, thanks for the reply!But, isn't it easier to use futures? For futures, the delta is one. Whilst for the swaps, when it comes to pricing/fixings, the swaps are no longer delta one?

Hello,when you're up to price asian options on commodities you're expected to be first able to price efficiently the swaps: that's because the shape of the fwd curve is the most important input. Once you can price efficiently swaps you can also hedge them efficiently with futures.So the choice imho is purely practical: as a trader I always want the futures screen under my finger for a fast proxy hedge, then I can decide if replicating the swap in house or buying it outside.Lastly I wouldn't forget the credit issue: when you hedge with swaps in the otc you add ctpy risk in your book. With futures you have the headache of delivery and margining....

Thanks tw..Indeed currently I am using futures and finding that I need to rebalance the "lost" volumes... CommOddity - thanks on your point on pricing the swaps..! but if part of the swaps had already priced.. isnt it easier to use futures?