FX · Options · Futures
XR1 Currency risk with options
Session timeline
Briefing
Trading40 min
Debrief
The case
A currency basket rate is shown but not traded. Options, a future and a Treasury strip carry the risk.
Objective
Hedge the currency risk in the short option. Graded on final wealth.
What it shows
- Currency risk that is hedged with a future and not with the currency.
- Options quoted by the case, so the hedge is the only decision.
- One jump in the rate, and what a hedge does across it.
Watch out for
- Hedging to the rate on screen, which is not something that trades.
- The jump in the rate, which nobody can time.
- Interest at 3% on the strip and on cash, which the future must be priced against.
Who takes part
- Type A — half the class. Starts short 2,000 calls, C290.
- Type B — the other half. Starts short 2,000 puts, P290.
- Both trade FUT, the exchange-rate future, and STRIP, a two-year Treasury strip. RATE is shown and cannot be traded; option quotes are fed.
Class size
Any size. Quotes are fed, so each student hedges alone.
Concepts
- Currency risk
- Hedging
Roles
Type A
You are type A. You start short 2,000 calls, C290.
- RATE is the basket rate. It is shown and cannot be traded.
- You trade FUT, the exchange-rate future, and STRIP.
- Option quotes are fed. The rate jumps once.
- Assessed on final wealth.
Type B
You are type B. You start short 2,000 puts, P290.
- RATE is the basket rate. It is shown and cannot be traded.
- You trade FUT, the exchange-rate future, and STRIP.
- Option quotes are fed. The rate jumps once.
- Assessed on final wealth.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| RATE | Basket rate for 500 units | Continuous trading | See it, not trade it |
| STRIP | Treasury strip at two years | Continuous trading | Trade it |
| C290 | Call at 290 | Quoted price | Trade it |
| P290 | Put at 290 | Quoted price | Trade it |
| FUT | Exchange-rate future | Continuous trading | Trade it |
In the tracks
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