Using call on Treasury bonds to hedge Treasury bonds position, delta, solution, dynamic, company

DarienHacker

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.

bkballa

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.

PalacioHill

ignore my earlier answer. missed that...

CP

aidebaobao

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

justin88

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.