Delta Hedging at Dayton Manufacturing
In the summer of 2005 Scout Finch, Treasury Manager at Dayton Manufacturing, a US-based manufacturer, was evaluating the use of a new foreign exchange hedging technique - delta hedging. In the previous 90 days Dayton had suffered significant losses on long positions in both the British pound and European euro as a result of hedging with purchased put options. Scout’s treasury consultant had recommended that Dayton consider using a hedging technique which used only forward contracts, but did so in a dynamic strategy in which the company updated its hedging position regularly over the life of the exposure. Scout wishes to evaluate delta hedging in terms of its expected returns and risks for Dayton.
The case is intended to serve as both a theoretical instructional note on delta hedging, as well as a real business problem platform in the use of the technique. The case provides a very clear step-by-step template for the actual execution of delta hedges under a variety of different currency conditions (periods), including appendices which use actual exchange rate data from the spring 2005 period for the US dollar/euro and US dollar/British pound exchange rate. In addition to a series of basic exercises which the student can complete, there is an Excel model which is included with the case (upon request), as well as a detailed series of lecture notes on the theoretical derivation of option deltas for the use of the instructor.