标题: Using call on Treasury bonds to hedge Treasury bonds [打印本页] 作者: DarienHacker 时间: 2011-7-11 19:02 标题: Using call on Treasury bonds to hedge Treasury bonds
A company has a $3M position in fixed-rate Treasury bonds and it will like to hedge the position using out-of-the money call (each cover $100,000) on Treasury bonds with delta of 0.3. How this can be implemented ? The solution said it shall SELL 100 Treasury bond calls.
Why ? Can anyone explain ? Please note it does not mention that this is a dynamic hedge.作者: bkballa 时间: 2011-7-11 19:02
My question point is : Why Treasury bond call can be used to hedge the position of Treasury bonds, not the number of the calls used here.作者: PalacioHill 时间: 2011-7-11 19:02
ignore my earlier answer. missed that...
CP作者: aidebaobao 时间: 2011-7-11 19:02
If you own the bond, why would you want to purchase a call as a hedge? That would increase your exposure, so you sell them.
Or, you can purchase puts to limit your downside.
NO EXCUSES作者: justin88 时间: 2011-7-11 19:02
I think this is a dynamic (delta) hedging, as stated on p.456~464 of cfai text vol 5. The stock position is replaced by bond position here.
Bond price rises => Bond position : Gain, Call : Loss
Bond price falls => Bond position : Loss, Call : Gain
Gain/Loss will offset only for a SMALL change in underlying (bond) price. So, a large change in bond's price can not be hedged away by this hedge due to gamma effect.
