Q: Suppose a manager has position in fixed rate bonds and wants to hedge this exposue. OTM Calls each cover 100000 par value of bonds, have delta of 0.4. So would you buy/ sell and cal # of contracts.
I was trying to reason it out. You want to hedge against rate increse. Buying call, and ex them if rates reach threr and take profit to offset the loss on bonds-right?
Like to hear what others have to say here
It’s depend on the option underlying. If the option underlying is interest rate and the bond is an asset then your discreption is right buy call to compensate your losses of the bond price. But I don’t know why you are trying to complicate it. Just use equity as provided in the curriculum and don’t imagine too much.
This is an practice exam Q
Ok then let me know is the bond a liability or an asset ? Is the option underlying interest or bond ?
My bad. the question clrearly say has position then your readoing I guess right. !!