Understanding Delta in Hedging Strategies

Medium Risk Management Applications Managing Market Risk

Alex is a portfolio manager overseeing a large equity fund. In light of increased market volatility and potential economic uncertainty, Alex is considering various strategies to manage market risk within the portfolio. One strategy involves using options to hedge against potential declines in specific sectors that have underperformed recently. However, Alex wants to understand the different levels of risk exposure resulting from this strategy.

Which of the following statements best describes the concept of 'delta' as it relates to Alex's hedging strategy?

Delta measures the sensitivity of the option's price to changes in the price of the underlying asset.

Delta indicates the likelihood that the option will expire in-the-money.

Delta represents the maximum loss potential when employing the hedging strategy.

Hint

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