Ok, so I feel like this shouldn’t be that hard but I can’t wrap my mind around one little part. The specific question is in Schweser Practice Exams Volume 1 Exam 3 Afternoon Question 29. So a collar is when we have a long put and and short call on an asset. It provides us with downside protection and we retain some upside ptentail as well. If we we’re a country A investor and we own stock in country B. We want to hedge our currency risk so the answer is to by out-of-the money (OTM) calls on currency A and sell out-of-the money calls on currency B. The answer says purchaseing OTM put on currency B is equivalent to an OTM call on currency A)- This makes sense.
The part I don’t understand is how a sale of an OTM call on currency B is equivalent to an OTM put on currency A)
So a short call on currency B is the same as a put on currency A? This doesn’t make sense to me? Any help would be much appreciated!!
I completely understand what you’re saying. The only part that confuses me is in the writing it DOESN’T say short put. It says, “equivalent o an OTM put on currency A.” I agree with you that it should be the same as a “short” put on currency A, but it only says PUT. Whether we’re long or short changes the how equation in my mind. May it’s infered that it should be a short put on currency A?
faced the exact same. i believe the question here is again framed tricky where they are leaving it to us figure the long/short part in their own question stew.
