cmegroup.com/fx As was the case with our delta neutral short call hedge, we know that the put delta will be sensitive to changing market conditions. If, for example, the market were to decline, the puts will go intothe-money and the delta will increase. This implies that one might liquidate some of the long puts to maintain a delta neutral stance. Or, if the market advances, this implies that the put options may go out-of-the-money and the delta will decrease. This may suggest that you purchase more puts to maintain a delta neutral stance. However, one might observe that as the market declines, the put options essentially provide more protection just when you need it most by virtue of the advancing delta. Or, that the put options will provide less protection as the market advances by virtue of a declining delta at a point.

This calls the question … why adjust the hedge ratio when the options are “self-adjusting” in a beneficial way? Of course, the risk of this strategy is that the market might simply remain stagnant and the hedger is subject to the ill effects of time value decay. As such, the use of long options is a hedging strategy most aptly recommended in a volatile market environment. One may pursue a delta neutral strategy with the use of long put options. However, long puts are essentially self-adjusting in the sense that they provide more protection as the market moves adversely and less protection when the market moves favorably.

Thus, it is not clear whether one really needs to adjust the hedge ratio at all in this context. For more information on CME Group FX, visit www.cmegroup.com/fx. CME GROUP HEADQUARTERS 20 South Wacker Drive Chicago, Illinois 60606 cmegroup.com CME GROUP REGIONAL OFFICES info@cmegroup.com 800 331 3332 312 930 1000 New York 212 299 2000 London + 44 20 7796 7100 São Paulo Houston 713 658 9292 Washington D.C. 202 638 3838 +55 11 2565 5999 Singapore +65 6593 5555 Tokyo +81 3 5403 4828 Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles.

And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures. CME Group is a trademark of CME Group Inc. The Globe Logo, CME, and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc.

CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX is a registered trademark of the New York Mercantile Exchange, Inc. All other trademarks are the property of their respective owners. The information within this brochure has been compiled by CME Group for general purposes only.

CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and NYMEX rules.

Current rules should be consulted in all cases concerning contract specifications. Copyright © 2010 CME Group. All rights reserved. FX262/0/0410 .