Basis Options Delta Hedging

21 Pages Posted: 6 Oct 2005

See all articles by Robert Brooks

Robert Brooks

Financial Risk Management LLC

Brandon N. Cline

Mississippi State University

Date Written: September 23, 2005

Abstract

The difference between a basis option pricing model on futures or forward contracts, assuming both underlying futures contracts follow geometric Brownian motion, and a basis option pricing model on futures contracts, assuming both underlying securities follow arithmetic Brownian motion are non material from a risk management perspective. We show this by demonstrating that the differences in the deltas and gammas of the two models are not materially different. This being the case, the normal assumption on the underlying futures contracts can be made easing the risk management computational burden.

Keywords: Options, Options on Futures Spreads, Lognormal, Normal

JEL Classification: G13

Suggested Citation

Brooks, Robert E. and Cline, Brandon N., Basis Options Delta Hedging (September 23, 2005). Available at SSRN: https://ssrn.com/abstract=815225 or http://dx.doi.org/10.2139/ssrn.815225

Robert E. Brooks (Contact Author)

Financial Risk Management LLC ( email )

13157 Martin Road Spur
Northport, AL AL 35473
United States

HOME PAGE: http://www.robertebrooks.org

Brandon N. Cline

Mississippi State University ( email )

Mississippi State, MS 39762
United States
662.325.7477 (Phone)
662.325.1977 (Fax)

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