Delta Hedging Technique at Dayton Manufacturing
It should be noted that all the relevant calculations are available in the excel spreadsheet.Also,the necessary tables have been posted in this document for better understanding.
After getting the above results, the comparison between the new technique and previously used techniques has also been made in the tables which are given below. The figures which are blue indicate the inflows or money, which is earned and the figures in red is the money, which is lost or is the outflow.
The difference between all the used strategies has also been shown in the tables afterwards the rating of all these strategies is given as per the criteria of the company.
DOLLAR MOVEMENR SCENARIOS
Domestic interest rates 0.0600 0.0600 0.0330 0.0330
Foreign interest rates 0.0800 0.0800 0.0400 0.0200
Forward rate range 1.7540 1.7612 1.7540 1.7371 1.9050 1.8286 1.3353 1.2239
Spot Rate Range 1.7640 1.7618 1.7640 1.7350 1.9111 1.8311 1.3309 1.2200
Remained uncovered 1,761,800.0000 2,792.0000 1,735,000.0000 (10,522.0000) 1,831,100.0000 (41,577.0000) 1,220,000.0000 (88,789.5000)
Forward covered 1,754,000.0000 5,008.0000 1,754,000.0000 8,478.0000 1,904,960.0000 32,283.3300 1,335,300.0000 26,510.1000
Put Option Cover 1,734,625.0000 (24,383.0000) 1,734,635.0000 (10,887.0000) 1,863,818.0000 (8,859.0000) 1,308,500.0000 (289.5000)
Delta Hedge 175,900.0000 – 1,741,211.6667 – 1,866,626.0000 – 9,203,853.6002 –
Remain uncovered 1 4 4 4
Forward covered 3 1 1 1
Put option cover 4 3 3 3
Delta Hedge 2 2 2 2
It can be clearly seen from the ranking table that delta hedging strategy is the most feasible technique as per the riskiness of the portfolio.There were two cases; one is the stable dollar and the second is the strong dollar. In the first case, we saw that the company lost its money as it is also indicated in the book (John H, 2013) that the purchase or call option has a very high cost, which leads the strategy to failure. In our case we can state that the most viable and feasible strategy is the delta hedging strategy, which is leading the company towards profits.
Moreover, we can see that the exchange rates are moving around the same value, a higher value is being paid under the uncovered strategy. In the second case of strong dollar, if the portfolio takes a forward position, then it will be the best strategy because the dollar will become stronger. A huge amount of money is lost by the uncovered portion and the put options cover the major portion of the money, and same goes for the 3rd and 4th case.
Riskiness of Delta Hedging
As we can see in the ranking table the delta hedging is ranks 2nd out of 4 scenarios.According to the ratings we can say that the delta hedging strategy is the most viable and feasible strategy for the company. 3 cases were about the strong dollar case out of 4 and the 4th was about the stable dollar case.
here are some other justifications regarding the specific strategy, which are stated below:
Similarity of Delta hedging to Forward Contracts
Delta hedging strategy uses forward covering options, which is a linear hedging technique as it has been discussed(B, 1987).This technique is globally used in order to minimize the total risk exposure of the portfolio to 0, it also tells the total amount, which should be covered to the last Dollar.In our case we used the Black and Scholes model for the valuation of the amount’s part, which is being covered by delta and the other part by the forward cover…………………..
This is just a sample partial work. Please place the order on the website to get your own originally done case solution