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Is asking to buy options more often than asking to sell options in AFM exam?
Concerning risk hedging using financial derivatives, are my following interpretations correct?
For interest rate risk:
Borrowing needs to buy put options, depositing or lending needs to buy call options.For foreign exchange rate risk:
It depends on the options contract currency, together with the type of transaction.If the contract currency is dollars and we are to sell pounds to buy dollars, we use call options. If we are to sell dollars to buy pounds, we use put options (buy call sell put).
If the contract currency is pounds and we are to sell pounds to buy dollars, we use put options. If we are to sell dollars to buy pounds, we use call options (again, buy call sell put).
I have not counted which is the more common in the exam – both buying and selling options are examinable. As to which depends on the circumstances in the question.
What you have written for interest rate risk is correct.
For foreign exchange rate risk we do not buy calls and sell puts. We either buy a call option or we buy a put option depending on whether the underlying transaction involved buying or selling the the contract currency. (We only both buy and sell options if we are trying to create a collar to hedge against interest rate risk)
All of this is explained in detail in my free lectures on interest rate and foreign exchange risk management.
Thank you Mr. Moffat for your clear explanations in your prompt reply. I am now knowing better on risk hedging of foreign exchange rate.
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