SGGI Asset Allocation Topic Test

Just working through topic tests and hoping people can opine on the questions below.

Q1) Can someone explain why a mismatched hedge causes us to transact in the spot mkt to close out a long position at bid price in this question? Not clear on this concept.

Q6) I felt that this questions was leaning towards a Straddle / Strangle, and was surprised to see a Sea gull spread implemented. Could someone explain why the seagull fits here and describe its implementation in a more plain english way.

Thanks really appreciate it.

You should always follow the simple rule:

Buy base on Ask, sell base on Bid. Since you have offsetting forward transaction, you should sell USD on bid which is on forward discount.

YES, please, someone explain the Long Seagull Spread in plain English. I’m having an options melt-down. Trying to graph payouts is only making things worse. I’m starting to confuse what a payoff looks like when it’s just the option versus you holding the underlying asset plus the option.

Does the definition of a Long Seagull Spread include HOLDING the underlying, or is that an additional position besides the Long Seagull Spread?

Put spread + Sell a call. Sell X1 buy X2 sell X1

Or it’s a Short Risk Reversal (Collar) + selling a put. Gives you a little protection while letting you offset cost. I believe it’s only used when you own the underlying.

It looks like a seagull flying at you at a slight angle.

*Note…I’m terrible with currency. So take the short risk reversal part with a grain of salt. Update: I was right, it is a short risk reversal. Wooooooo

Edit two: apparenlty there is a long seagull and a short seagull. Fun.

Long = Write ATM call, buy a higher call, buy a lower put.

Edit three: think of this way, why would you need any downside protection if you didn’t have something to hedge? At that point, you would either straddle or reverse it for bets on VOL, or take a view it’s going up/down and buy a call or put.