What is Delta hedging in FRM Part 1?

Offsetting an option portfolio’s first-order sensitivity to the underlying by trading the underlying or a related instrument. Because delta changes with price and time, maintaining the hedge requires rebalancing and leaves gamma, vega, and gap risk.

Delta hedging

FRM Part 1 glossary · Valuation And Risk Models

Definition

Offsetting an option portfolio’s first-order sensitivity to the underlying by trading the underlying or a related instrument.

Delta hedging in plain English

Because delta changes with price and time, maintaining the hedge requires rebalancing and leaves gamma, vega, and gap risk.

Learn these first

Binomial option pricing model

Practice Delta hedging

In option trading, the term 'dynamic hedging' refers to the process of:

Related FRM Part 1 terms

Backtesting
Basis
Basis point
Binomial option pricing model
Black-Scholes-Merton model
Coherent risk measure
Component VaR
Convexity
Delta
Duration (modified)

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