how do you hedge a long bond postion with an equity put? One of the traders wants to do it and i don’t fully understand the risks…
Actually. i think i got it. This is just a protective put with a bond instead of an stock. I guess we’re buying a put so the credit risk is to the option seller…
What would happen if the bond were to default completely, could we put it back to the put seller?..
So it is a put on a bond? I don’t see why you would not be able to exercise the put in a complete default. The bond (i.e. the paper) would still exist - it would just not be worth very much.
Are you long the put on the equity of the long bond or long a put on the bond?
He said the former. Long equity put and long bond.
Seems simple to me. You buy a set of puts at a strike that equals the value of your bond.
For example, if you have 1,000 in bond XYZ, you could buy 10 puts at a strike of $1. If the company fails, the equity will be just about worthless and your long put will have hedged a good portion of the loss on the bond.