I saw a question asking about a wheat farmer who was looking to hedge ...

Series 3 test takers can certainly expect to see questions regarding delta hedges on the exam. Remember that an option’s delta is its rate of change or its participation in the price movement of the underlying futures contract. An option contract with a delta of 20 would participate in 20 percent of the price change of the underlying futures contract. As the farmer is looking to hedge their corn crop of 200,000 bushels the first thing we need to do is to calculate the number of futures contracts required to hedge the crop. Each corn futures contract covers 5,000 bushels. Therefore, the farmer would need to sell 40 futures contracts to hedge the crop against a decline in prices. The farmer can also hedge the crop using options. As a producer of corn the farmer is a short hedger. Instead of selling futures the farmer could purchase put contracts on corn futures. Since the question asked about using options with a delta of 20, we must now calculate the number of put contracts needed to hedge the 200,000 bushels of corn. Because the options delta is 20 it takes 5 contracts to hedge the price move of 1 futures contract. So to determine the number of put contracts required we multiply the number of futures contracts required to hedge the crop by 5. In this case the farmer would have to purchase 200 put contracts to hedge the crop.