Delta hedging

What it means

Offsetting an option position with the underlying so the combined position is insensitive to small price moves.

The exam angle

Only holds locally and only for an instant. Gamma is precisely the reason it has to be rebalanced, and rebalancing is what costs money.

Where it appears in the syllabus

• DerivativesCFA Level II · exam weight 5–10% · Forward commitments and contingent claims — binomial, BSM, the Greeks.
• Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.

Related terms

• GammaThe rate at which delta changes as the underlying moves.
• Implied volatilityThe volatility that, put into an option pricing model, returns the option’s observed market price.
• Black–Scholes–Merton modelA closed-form model for European option prices, assuming lognormal prices, constant volatility and continuous…
• RhoThe sensitivity of an option’s value to a change in the risk-free rate.
• ThetaThe change in an option’s value from the passage of one day, all else equal.
• VegaThe change in an option’s value for a one point change in implied volatility.