Hi, This is in regard to an assignment question. The firm wants to buy options to protect themselves against a rise in Interest rates. Option strategy is Purchase 200 PUT Options with Strike Price ____ Now I have shortlisted the following position that I can take, and I have to choose one of them. The firm is interested in hedging from Interest Rate rise and hence attitude to risk is to minimise risk. I would like to know what sort of factors should I take into account before choosing one of these positions? In other words, on what basis should I deside which is the best position out of these? Thanks Joanne
I would go 3-5% OTM to purchase the puts. That is where most money managers "shop" for insurance. Also, you did not mention the instrument, but most managers look at eurodollar futures, for they are the most liquid.
Your first name is Joanne? The correct option is to be married to a trader and have kids within 5 years.
"The Firm" should immediately hire a consultant who understands hedging with options and pay him/her a lot of money to execute the hedge properly! "The Firm" also should reconsider the employment agreement with an employee who has this kind of naive questions.
Guys I believe this is someone asking a homework question from school so look at it in that light. My advice when these questions come up is to always make the person work through it since it is THEIR homework, not ours.