After discussion in a recent webinar on the price action of the GBPUSD we stumbled across a huge aspect of the market that is barely touched upon (or even known) about from a retail perspective. That is Delta and gamma hedging in the spot FX market. Firstly we need to define these, and in the least mathematical way (to keep it simple)
Delta - the change in value of the derivative compared to the change in price of the underlying asset. Delta can be expressed in a few ways, but in the FX markets it will normally be represented as a % of the notional position. For example, if I have an option position in EURUSD worth €1,000,000 and a delta of 25% then my option increases or decreases in value at 25% of what the EURUSD moves. I.e. If the EURUSD rises 1%, then my option rises by 0.25% etc
Gamma - this is the second derivative, so this is the change of delta for a change in the underlying. Delta is not constant, and as the EURUSD rises the delta changes (this relationship is defined by gamma). Once again quoted in %. For example the same option above with a delta of 25% (€1,000,000 value) might have a gamma of 10%. This means that for a 1% change in the EURUSD the delta changes by 10%. …
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