Any idea why it was better to buy futures instead of options for the interest rate example? (interest rates were declining and interest rate volatility is expected to increase)
If interest rate volatility is expected to increase, option values will be higher because options are positively related to volatility. So always remember if you expect volatility to increase more than implied, use options. If not, hedge dynamically using Futures.
Yea thats what I thought as well – but the CFAI answer says buy futures …
You sure you read the question right… did they say implied volatility will be greater than expected? or the other way around?
Thanks – they say “our expectations is that current vol will exceed future interest rate vol” – so I guess volatility is expected to drop …
exactly… I hate how they play on words… it makes me sick!
that means volatility is high now…therefore the options will be pricey -> buy futures instead.
Yea the reading part is a complete pain in the arse – I keep messing up so many easy questions that way ughhh
current will exceed future = vol is going down = don´t buy options = use futures and if int go down, and you have negative convexity, you want “more slope” = more duration = buy futures if int go up, and you have negative convexity, you want “less slope” = less duration = sell futures
What is the question #? From 2007 AM session??