Of an option, to put into effect the right to buy or sell at the strike price.

An option which can only be exercised on expiration.

Properly a measure of the percentage change in the option premium for a 1% change in the asset price.
Sometimes loosely used as a synonym for delta (delta strictly measures the absolute change in the option premium for a one unit change in the underlying).
Because elasticity is usually significantly positive (a 1% change in the asset price can give rise to more than a 1% change in the option price) it is also sometimes used as a synonym for gearing.
This is most common in the warrant market, where it is calculated as delta times the price of the underlying divided by the option price.

Replication of the payoff of a portfolio long the underlying and long a put by continuous delta hedging.
It started as a theory of Hayne Leland and Mark Rubenstein on the back of the Black-Scholes model.
It was used to provide put protection for equity portfolios at a time when portfolio puts were not available.
The theory assumed that an option position could be replicated by continuously adjusting the fraction of funds invested
in the underlying equities with the remainder invested in a risk-free asset.
An initial hedge of treasury bills was created, its size depending on the level of protection required.
If the portfolio value fell, stocks had to be sold and the hedge position increased; the opposite had to be done if its value rose.
The theory worked as long as volatility was predictable and low and while markets did not gap dramatically.
Since it relied on a large amount of trading in the underlying, it also required liquid markets and low bid/offer spreads.
The price discontinuity experienced in the 1987 crash caused such strategies to lose money and credibility.
Also known as portfolio insurance.
See delta hedging, static replication, replication.

Call options are said to be delta positive because their value increases by the value of delta for a one unit rise in the price of the underlying.
Put options are said to be delta negative because their value decreases in value by delta for every one unit rise in the price of the underlying.
This relationship can be upset in barrier options.
An in-the-money knock-out call {put} will behave normally until, at a point near to the knock-out, any further increase {decrease}) in the underlying
will cause the value of the option to drop because the probability of its being knocked-out is more significant than the fact that it is moving further into the money.
At this point puts become delta positive and calls become delta negative.

An option portfolio delta-hedged such that it has no exposure to small moves in the price of the underlying.
In practice, since delta is altered by all but the very smallest changes in the price of the underlying,
by the volatility of that price, by the maturity of the option, by how close-to-the-money the option is and by interest rates,
the ratio of options to underlying must be constantly re-balanced to maintain delta neutrality.

Delta is the neutral hedge ratio derived from the Black-Scholes model the ratio of underlying asset to options necessary to create the risk-free portfolio that is at the heart of the Black-Scholes option pricing formula.
So the delta of a stock option indicates the number of shares needed to hedge a position in an option on that stock.
For example a portfolio long 100 stock call options with delta of 0.3 is delta hedged by a short position of 30 shares and the delta of an interest rate option indicates the notional amount of interest rate swap required to hedge it against small movements in interest rates.
Delta hedging is the application of this concept to the hedging of options portfolios.
A true delta hedge is the combination of underlying asset and money market instrument that creates the riskless hedge Black-Scholes says will exactly replicate the pay-off of the option to be hedged.
See delta, dynamic hedging, static replication, replication.

ome of this is necessary to express the basic operation of options contracts (such as ‘premium’ or ‘exercise price’)
and some of it is the result of the mathematical complexity of option pricing.
In particular, it is impossible for any potential user of options to avoid contact with the ‘Greeks’
a set of Greek letters used to denote variables used in option valuation.
However, although the underlying mathematics used in today’s option pricing models can be complicated
and well beyond the grasp of non-mathematicians, it is not necessary to understand advanced calculus
nor even the key variables such as delta and gamma respectively the first and second derivatives of the option premium
with respect to the price of the underlying.
For an end-user who needs to hedge an underlying cash position, or an investor who wishes to take a directional view on a market,
the concepts that the ‘Greeks’ represent and their impact on the price of any particular option are intuitive and easy to grasp.
This page explains all the terms an end-user of options (as opposed to a professional trader) is likely to encounter in putting together an options trade.
For easy reference, ‘Greeks’ are listed below with a brief explanation.

For interest rate options delta can be calculated with respect to the underlying bond price,
with respect to each underlying forward interest rate (as sometimes with cap deltas),
or with respect to a small parallel shift in the zero coupon yield curve so that delta is the change in the option price for a small change in all zero-coupon rates.
See delta hedging, dynamic hedging, static replication, replication.

State pension fund puts $280 mln with 11 managers

* Most managers get $25 million allocation

* More managers expected to be hired in December

BOSTON, Oct 11 (Reuters) – Massachusetts, which has long bet big on hedge funds, hired 11 managers on Tuesday as part of the state’s push into direct investments with these types of portfolios.

Trustees for the roughly $46 billion state pension fund voted on Tuesday to send $280 million into some of the world’s biggest and best-known hedge funds.

A year ago, the pension fund agreed to stop using so-called funds of funds to select hedge funds and thereby save on fees. The state’s treasurer, Steven Grossman, said that state prefers to have a direct relationship.

Now the fund unveiled the first managers in its direct hedge fund investment program.

Massachusetts sent $25 million to each of the following fund firms: Anchorage Capital Group, Arrowgrass Capital Partners, BlueCrest Capital Management, Brevan Howard Capital Management, Claren Road Asset Management, Elliott Management, Kingdon Capital Management, Och-Ziff Capital Management Group , Taconic Capital Advisors and York Capital Management. Viking Global Investors will receive $30 million.

The pension fund used consulting firm Cliffwater LLC to help find the hedge funds.

Another group of 10 managers is expected to be hired in December, executives at the pension fund said.

In the past, hedge funds have helped shore up the Massachusetts’ pension fund’s returns but this year many hedge funds are experiencing though times amid concerns about Europe’s debt crisis, the stalled U.S.economy with its stubbornly high unemployment rate, and concerns over upcoming elections around the world in the next year.

Quelle

Basel III – Leitfaden zu den neuen Eigenkapital- und Liquiditätsregeln für Banken