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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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P3tr4 avatar
P3tr4 19 Feb.

well done. Solid article

mimuspolyglottos avatar

This is N. Taleb's "Dynamic Hedging" in 1:100 scale with effortless reading. Trading FX from spot trading perspective is very much like sitting on iceberg without much and proper information what is beneath waterline, and You are trying to uncover this "underworld" for us. Thank You so much. Valued.

jezz avatar
jezz 20 Feb.

This month we have some hidden treasures of Forex introduced. Hedging strategies are my cup of tea, yet I still have a lot to learn

scramble avatar
scramble 27 Feb.

well exposed concept! well done! :)

AdrianWS avatar
AdrianWS 27 Feb.

Cheers everyone! Am just trying to drill home the idea that FX options are far more important than they may originally seem.


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EURUSD 1.2300 strike expiry today rumored for good size ........says the news headline, but how do you interpret this ? To
understand fx options it is best to explain some of the conventions that all
professional option traders know but is not necessarily, written down anywhere. The aim of this article is to level the playing field somewhat for the retail trader by discussing common procedures in the interbank fx options market.
Cut-off times
Majority of the fx option flow is OTC (Over-the-counter),
which basically means that it is independent of any exchanges. While terms can
be individual, in order to maintain liquidity there are a number of
standardized conventions. Still, these conventions vary from currency pair to
currency pair.
If you know a little about fx options, you have probably
heard about NY cut-off which is 10AM New-York time. This is when almost all fx options are expired, especially for
majors, but there are a few exceptions.
If you trade emerging market currencies you should know that
for TRY, the cut-off is 12:00 London time, while for PLN it is 11:00 Warsaw
time (normally 10 LDN), while for HUF it is 12:00 Budapest time (normally 11
LDN). If you trade asian emer…
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