GARP Financial Risk and Regulation (FRR) Series 2016-FRR Question # 64 Topic 7 Discussion
2016-FRR Exam Topic 7 Question 64 Discussion:
Question #: 64
Topic #: 7
A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?
A.
The options positions hedge the forward position by 25%.
B.
The option positions hedge the forward position by 50%.
C.
The option positions hedge the forward position by 75%.
D.
The option positions hedge the forward position by 100%.
The risk manager has a long forward position of USD 1 million. The options portfolio decreases by JPY 0.50 for every JPY 1 increase in the forward position. This indicates that the options provide a hedge that is half the size of the forward position because a JPY 1 increase in the forward position is offset by only JPY 0.50 from the options. Thus, the options positions hedge the forward position by 50%.
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