Learn / Library / Market making

Beta hedge size

Market makingEasy

A market maker is long $100$ units of contract A. Each time contract B moves by $1$ , contract A moves by $1.5$ in the same direction. How many units of B must the market maker sell to neutralize small price moves?

Checking an answer needs JavaScript. The hint and the solution open without it.

Hint

Match the dollar sensitivity of both legs.

Solution

The long position changes by $100 \times 1.5$ for each move of $1$ in B.
A short position of h units of B changes by $h$ in the opposite direction, so these must be equal.
The hedge is $150$ units.

Answer: $150$

Next question Back to the library