XR2 Currency crisis

As XR1, with the rate collapsing part-way. The option quotes jump with it.

Objective

Hedge the currency risk in the short option through a crisis. Graded on final wealth, from 20 at 4,500,000 to 402 at 100,000,000.

What it shows

• What a hedge is worth when the rate does not move smoothly.
• Option quotes that jump with the rate, so a delta hedge is wrong the moment after.
• The same market as XR1 with a crisis in it, so the two can be compared.

Watch out for

• A hedge sized to a calm market, left standing when the rate collapses.
• Quotes that change faster than an order can be placed.
• A grade that pays far more at the top than the bottom.

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.

Class size

Any size. Runs well straight after XR1 with the same class.