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The June 2015 Q.4 states ”and that if the options are in-the-money, they will exercised at the end of the hedge instead of being sold.”
What is meant by this?
Isnt this what we always do with interest rate options (that is we exercise them if its in the money).When do we sell an interest rate option? Has there been any exam question where we sold an interest rate option rather than exercising it or doing nothing about it?
Yes – we only exercise options if they are ‘in-the-money’ and we will therefore benefit from exercised them.
If we choose not to exercise them, then potentially they could be sold (although if they are not in the money they might not be worth anything!), but in the exam there has never been mention of selling an option that was bought previously.
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