"If there is no priced risk--including volatility risk--associated with hedging an option, then expected delta hedging errors should be zero. This paper finds that delta hedging errors of a synthetic at-the-money call option on foreign exchange futures are significantly positive and cannot be explained by standard asset pricing models. However, we cannot rule out the hypothesis that delta hedging errors reflect rational pricing; foreign exchange volatility and stock market volatility predict them. Moreover, foreign exchange volatility also predicts excess stock market returns, indicating that foreign exchange volatility risk might be priced because of its relation to foreign exchange level risk"--Federal Reserve Bank of St. Louis web site.