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FX Derivatives Trader School by Giles Jewitt

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Chapter 14Vanilla FX Derivatives Trading Exposures

In Part I, Greek exposures were examined within a stylized framework. In practice, even the simplest Greek exposures have additional layers of complexity that must be understood by FX derivatives traders within their risk management.

Delta

Delta c14-math-0001 is one of the most important exposures to a derivatives trader—the sensitivity of price to a change in the underlying. It is a simple concept but there are many possible variations in exactly what the delta exposure represents.

Spot Delta versus Forward Delta

Apologies if this is obvious, but the spot delta on a spot deal is 100% of the notional. Therefore, buying GBP50m GBP/USD spot results in longer GBP50m GBP/USD spot delta exposure within the trading position. For this reason, FX spot traders talk only in terms of net long or short positions, rather than their exposures. The forward delta on a forward outright contract is 100% of the notional. Selling USD100m of 1yr USD/CAD forward outright results in a shorter USD100m USD/CAD 1yr forward delta exposure within the trading position.

Delta exposures can be present valued or future valued like cash flows. Therefore, on a specific trade:

equation

where is the discount factor in the delta currency to the forward maturity, is the spot delta, ...

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