Delta Hedging Technique at Dayton Manufacturing Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Delta Hedging at Dayton Manufacturing

Case Solution

Problem Statement

Scout Finch is the treasury manager at Dayton manufacturing.The company is a US manufacturing firm and it has been working for a long time in the industry. Finch is evaluating the new foreign exchange hedging techniques and looking for the most feasible option to apply. It has been noted that many losses occurred in the last 90 days because of the long position and investment in British pounds sterling and Euros.

Due to the occurrence of losses and instability in options the company’s consultant recommended and used a new technique which is known as the Delta Hedging Strategy.This strategy is quite different from the traditional hedging techniques. By using this strategy the hedging position of the hedger updates frequently thorough the entire life of risk exposure in accordance with the floating and changing spot rates.This strategy leads to a risk free portfolio.

This paper will analyze the hedging position and the feasibility and other risk and rewards of the company by using this new strategy, which is known as Delta Hedging strategy. However,this paper will also show the analysis and the effects of this strategy on the company’s position.

Analysis
Hedge Updates, Valuations & Forward Contract Valuations
Exhibit 1
INPUTS/ASSUMPTIONS
Spot rate 1.3309 per Euro
Strike price (same units as Spot) 1.335 per Euro
volatility (annualized) 10%
domestic Interest rate (annualized) 3%
foreign Interest rate (annualized) 2%
time to maturity in days 92
Put option value 0.0265 per Euro
Euro Exposure 1000000 Euro
Initial Forward Rate 1.3353 per Euro

The assumption for the calculation of hedging updates and forward contract valuations are given in the table above. Moreover, the formula for put delta is given below
E-qt*(N (d1)-1)
(Jorian, 2009)
The d1 in the above formula will be calculated in the diagram below

The put option’s delta calculations are available in the excel file, where we can see that all the values of beta are negative, which indicates that these are put option’s delta. Using these values’ further calculations are made for forward contract in order to calculate appropriate hedging procedure.

On the other hand, we can see that there is a portion, which is still uncovered. Whenever we update the time to maturity and spot prices, the delta is recalculated and this is how the portfolio is aligned. The result of the change held in delta and the portion which is uncovered in the overall process is given below:

DELTA HEDGE RESULTS

Net proceeds from forwards 1,960,673
Proceeds from uncovered' 7,243,181
Total dollar proceeds 9,203,854......................

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