Delta Hedging Example in Excel (3 Ideal Examples)

In this article, we will learn how to perform Delta Hedging in Excel. Delta Hedging concept is used in Stock Exchanges. It is a strategy used for reducing the risk associated with Stock Markets. In Excel, we can easily do this. Today, we will show Delta Hedging Example in Excel. So, without delay, let’s explore the solutions.


Download Practice Workbook

To practice by yourself, download the following workbook.


What Is Delta Hedging?

In stock markets, a method called delta hedging is employed. It’s employed to lower the risk attached to Options and the Underlying Stocks of Stock Exchanges. It’s crucial to reduce risk while maximizing profit. The amount to sell or buy stocks while maintaining the lowest possible risk is indicated by delta hedging.


3 Ideal Examples of Delta Hedging in Excel

Delta Hedging is used in Stock Exchange. We will show you 3 ideal examples of performing Delta Hedging in Excel. Let’s follow the steps to learn how to perform Delta Hedging Example Excel.


1. Implement Delta Hedging Using Stocks in Excel

To demonstrate the method we will use a dataset of a company’s condition in the Stock Market. We have observed the company’s option price and the underlying stock on the 1st and 31st of October 2022. So, firstly, we will calculate the delta based to show the comparison between the 1st and 31st of October. After that, we will implement Delta Hedging using Stocks in Excel.

delta hedging example excel

According to the business model, Delta is the ratio of the difference between the Option Price and the Underlying Stock of the company. And Delta Hedging is a trading strategy to reduce directional risk. Let’s see the steps to perform delta hedging in Excel.

STEPS:

  • Firstly, we will use the following format for showing Options and Underlying Stocks.
  • For Option 1, we have inserted starting and the final values of Option and Underlying Stock.
  • After that, click on the C8 cell and write the following formula in the formula bar to calculate the Delta:

=(C5-C4)/(C7-C6)

  • Then, click Enter to see the result.

This formula mainly indicates (Final- Initial Option Value)/ (Final-Initial Underlying Value).

  • In the next step, according to our made format, insert information for Option 2.
  • Here, we have inserted starting and the final values of Option and Underlying Stock.
  • So, in the next step, we will calculate the Delta for Option 2.

Implement Delta Hedging Using Stocks in Excel

  • Now, click on the C16 cell and write the following formula to calculate Delta:

=(C13-C12)/(C15-C14)

  • Then, click Enter to see the result.

  • In the following step, we have to calculate the overall Delta for the company.
  • To do so, we have to sum up the Delta values for those options.
  • Therefore, select the C17 cell and write the following formula:

=C9+C16

  • Now, press Enter to proceed.

Implement Delta Hedging Using Stocks in Excel

  • In this step, you need to calculate the number of stocks needed to buy or sell.
  • So, select the C17 cell and write down the following formula:

=C17*100

  • Then, press Enter to exit from the editing mode and watch the result.

Here, for US stock options, with 1 option contract = 100 shares. So, 1 unit Delta means 100 shares or stocks. That’s why the number of stocks will be a multiplication of Delta and 100.

  • So, we have calculated the number of Stocks required for Delta Hedging.
  • But, we have not shown yet what to do with these stocks.
  • For Delta Hedging, you need to sell your stocks if Delta is positive.
  • After selling these stocks resultant Delta will be 0.
  • And, you need to buy these calculated amounts of stocks if Delta is negative.
  • For this reason, we will write the following formula in the D19 cell:

=IF(C17>0,"Sale","Buy")

Implement Delta Hedging Using Stocks in Excel

Here, the IF function determines if the value of C17 will positive or negative. If the value of the cell is greater than 0, it will return Sale or else it will return Buy.

Read More: How to Calculate Delta Between Two Numbers in Excel


2. Apply Options for Delta Hedging in Excel

In the above example, you can observe how we implement Data Hedging with the help of buying or selling Stocks. If the Delta is positive, then you need to sell some amount of stocks. But suppose, you do not want to sell the stocks. Then, how can you achieve Delta Hedging?

There is a solution and we will show you the solution in the following steps. If the resultant Delta is 0.6, then you have to buy contracts with -0.6. And if the resultant Delta is -0.6, then you have to simply buy contracts of +0.6. Let’s follow the steps below to learn the method:

STEPS:

  • Here, we have taken the previous dataset used before.
  • In Option 1, every piece of information is unchanged.
  • But in Option 2, we have changed the information a little bit.
  • That’s why we need to recalculate the value of Delta for Option 2.
  • So, write down the following formula in the C16 cell:

=(C13-C12)/(C15-C14)

  • Then, press Enter to see the resultant value.

Apply Options for Delta Hedging in Excel

  • After that, you have to calculate the total Delta for your company.
  • So, write down the following summing formula in the C17 cell:

=C9+C16

  • After writing, press Enter to proceed.

  • So, we have calculated the Delta value.
  • Now, we have to buy a contract with -0.2 so that the resultant Delta is 0.
  • To do so, write down the following formula in the C19 cell:

=C17*100/(200/100)

  • Finally, press Enter to observe the result.

Here, for US stock options, with 1 option contract = 100 shares. So, 1 unit Delta means 100 shares or stocks. That’s why 0.2 means 0.2*100=20 shares. And we need to divide the share with (total option value/100). Here, for 2 options, the total Option value is 200. Finally, the result is 20/2=10 which indicates Contracts.

Read More: How to Calculate Delta Percentage in Excel (4 Easy Methods)


Similar Readings


3. Utilize Management and Adjustments for Delta Hedging

In the last section, we will use management and adjustments for Delta Hedging Example in Excel. Previous examples show how to implement Delta Hedging by applying Options and Stocks. Suppose, instantly, Delta value changes and you need to take action rapidly. Then, Management and Adjustment terms come. Let’s follow the steps below to learn how to utilize Management and Adjustments for Delta Hedging.

STEPS:

  • From the previous example, we have taken this dataset.
  • For Delta Hedging, you need to buy 10 contracts.

Utilize Management and Adjustments for Delta hedging

  • Suddenly, Opinion 1 changes rapidly.
  • As per expectations, the Delta value of Option 1 will be 13.
  • The Final Value of the Option was supposed to be $120.
  • But, suddenly, the Final value of the Option changes to $170.
  • As a result, the value of Delta is changed to 0.3.
  • On the other hand, the value of Option 2 is unchanged.
  • So, the total Delta value is now 0.37.

  • In the following step, we will calculate the actions needed.
  • So, write the following formula in the F16 cell:

=F14*100/(200/100)-C19

  • Then, press Enter to proceed.

Here, for US stock options, with 1 option contract=100 shares. So, 1 unit Delta means 100 shares or stocks. That’s why 0.37 means 0.37*100=37 shares. And we need to divide the share with (total option value/100). Here, for 2 options, the total Option value is 200. Finally, the result is 37/2=18.5~19 which indicates Contracts. As already we have planned for buying 10 contracts. So, we need to buy more 1910=9 contracts.

  • In the previous steps, we have shown the amount but did not mention about buy or selling.
  • Here, if the F16 cell is greater than 0 indicates that we need to buy more.
  • Otherwise, you need to sell the contracts for Delta Hedging.
  • Write down the following formula in the G17 cell:

=IF(F16>0,"Buy","Sale")

  • After that, press Enter to see the result.

Utilize Management and Adjustments for Delta hedging

Read More: How to Use DELTA Function in Excel (3 Practical Examples)


Conclusion

In this article, we have demonstrated how to do the task of delta hedging with example in Excel. There is a practice workbook at the beginning of the article. Go ahead and give it a try. To read similar articles, check out the ExcelDemy website. Lastly, please use the comment section below to post any questions or make any suggestions you might have.


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Sudipta Chandra Sarker

Sudipta Chandra Sarker

Hello! Welcome to my Profile. Currently, I am working and doing research on Microsoft Excel. Here I will be posting articles related to this. My educational degree is BSc in Electrical and Electronic Engineering from Bangladesh University of Engineering and Technology, Bangladesh. I have a great interest in research and development. I always try to gather knowledge from various sources and try to make innovative solutions.

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