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.

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.

PalacioHill

ignore my earlier answer. missed that...

CP

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.