What is the adjustment from current −40 to target −50?
Reveal the worked answer
Sell ten.
Target minus current is −10.
Equity Index Futures · FUT-03 · Core
Futures as a dealer hedge
What part of an option book can futures offset?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: What is an equity index future?
Futures can efficiently offset broad directional sensitivity in index-related option books. The connection is Delta, not an assumption that every customer option trade forces a futures transaction.
Offsetting trades, other options and deliberate residual risk can all change the need to hedge.
Understand the mechanism
Express the book in dollars per index point and divide by the chosen futures point value with the opposite sign. If the product is only a proxy, adjust for its economic relationship rather than assuming identical points.
Net all included positions and compare the target with existing hedges. Only their difference represents a potential new order.
Walk through the process
Write exposure units, inventory source and timestamp. Identify the actual futures contract. Explain which risks remain, including Gamma, Vega and basis.
Public open interest is not an observed signed dealer book. Model-dependent inputs must remain labeled as such even when the arithmetic is exact.
Operational boundary
All prices, portfolio values and account balances are fictional. Real contract calendars, broker requirements and available liquidity must be checked for the instrument actually traded. The example's mathematical hedge or payoff is not an execution guarantee.
A worked example
Option Delta is hypothetically +2,500 dollars per point. At 50 dollars per future point, target hedge is −50 contracts. The desk already holds −40, so it sells ten more.
Later the book changes to +1,500; target becomes −30. Moving from −50 to −30 means buying twenty. The graph separates target from incremental changes.
Futures as a dealer hedge—worked comparison
Vertical: Target signed futures contracts
Horizontal: Option-book Delta (USD/point)
1. Fictional example
Read the graph as a data table
| Option-book Delta (USD/point) | Fictional example |
|---|---|
| 1,500 | -30 |
| 2,000 | -40 |
| 2,500 | -50 |
What would invalidate the reading?
Treating the entire target as new flow double-counts an existing hedge. Mixing share equivalents with index dollars per point can be worse.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
Treating the entire target as new flow double-counts an existing hedge. Mixing share equivalents with index dollars per point can be worse.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: What part of an option book can futures offset? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
Read this lesson as Markdown · Download its JavaScript content module