This may sound like a stupid question. Currently selling a USD/NZD put option for a ~2/3 cent premium depending on strike. How can i turn this into effectively selling a USD/AUD put option? Hedge the NZD AUD using a forward for the notional value at the expiration date?
Not sure why you wouldn't open up a separate USD/AUD position? If you don't want the USD/NZD close it. Getting cute with these things tends to eventually bite very hard, or at the very least cost you a bunch of extra money in commish/slippage. I think the idea of cross hedging and correlation-oriented hedging is in the long run a fool's errand, you will one day experience your own version of LTCM doing this sort of thing, the only hope being you don't have size on when it happens. If you're going to "hedge", hedge in the same product or directly-associated product (such as if you are long 6A you could lay on something in FXA or AUD/USD).