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Derivatives- Interest rate options

Someone please explain this to me—-

When interest rates increase, would you buy call option or a put option to hedge against that risk?

Call Option- Pay fixed, receive floating

Pay option- Pay floating, receive fixed

Thanks

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Call option - you would receive what is floating and pay a fixed rate, which is now lower than what the market offers.

aparnake wrote:
Someone please explain this to me—-

When interest rates increase, would you buy call option or a put option to hedge against that risk?

Are you paying the interest rate or receiving the interest rate?

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

S2000magician wrote:

aparnake wrote:
Someone please explain this to me—-

When interest rates increase, would you buy call option or a put option to hedge against that risk?

Are you paying the interest rate or receiving the interest rate?

S2000magician, 

Is that something you like to ask yourself while solving for these type of problems?

Thank you,

oak

oakwood42 wrote:
S2000magician wrote:
aparnake wrote:
Someone please explain this to me—-

When interest rates increase, would you buy call option or a put option to hedge against that risk?

Are you paying the interest rate or receiving the interest rate?

S2000magician, 

Is that something you like to ask yourself while solving for these type of problems?

Always.

oakwood42 wrote:
Thank you, 

oak

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/