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P4- Hedging Foreign Exchange Risk and Interest Rate Risk # The examiner gives 2 different exercise prices and increase or decrease in Interest rate and require to recommend a appropriate hedging strategy. Are we supposed to perform our calculation interms of two exercise prices and interest rates movement ( both decrease and increase ). One examiner report suggests that any justification on the second exercise price or one interest rate movement sufficient enough to score marks .. really confused !!!!
Ideally you would calculate for all exercise prices.
However the marks are really for proving that you understand how options work, and so if you are short of time then just doing the calculations for one of the exercise prices (and then writing that there are others available) will get you most of the marks.
Please can you explain how the collar hedge works, i dont just get it. Thanks.
I have written a detailed explanation that you can find here:
https://opentuition.com/articles/p4/interest-rate-collars/
(I assume that you have already watched the free lectures on interest rate risk management, and therefore know how options themselves work 🙂 )
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