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Forum Newbie
Group: Forum Members
Last Login: 6/18/2010 8:11:04 AM
Posts: 3,
Visits: 12
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Dear Steve,
please excuse my very limited knowledge of FX Options but would I not buy PUTS instead of calls, for example if I have a potion of BP
( which thanks to GOD I do not ) and I am afraid it will go down I would buy a PUT on BP to hedge,..when buying calls on BRL I would earn money if BRL goes up and US$ down, so for example if BRL raises from 1.78 ( current ) to 1.75 to the US$,- as our bond position will pay us back in BRL and we need to cover a credit line in US$, if BRL looses in value we get less US$ than we need to cover the credit, so a falling BRL against the US$ is the problem we like to cover,..
We could also sell a covered call - and earn the premium - but that might be a problem as the expiration of the bond trade does not go inside with Option expiration.
One more question is ( please ) what number of puts / calls I need to buy to hedge my position for each 1 mill US$ worth of BRL bonds as the currency of settlement is always US$ with BRL bonds
such as the KFW bonds,..
Is there a chance to talk to you Steve - phone ? Before we open an account - happy to pay for your advice,..
many thanks
BOND
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Forum Guru
Group: Administrators
Last Login: 6/13/2011 7:57:49 PM
Posts: 54,
Visits: 375
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Hi Bond,
It all depends what you are trying to hedge- if you are interested in gaining the interest differential in the Brazilian real, you would need a hedge if USD rallied since you are effectively long BRL by buying Brazilian bonds. ISE FX options are structured USD/BRL, therefore if BRL weakens USD strengthens you would purchase BRB calls to benefit (hedge) from a BRL weakness, since you are long BRL bonds.
Again, as I mentioned in the past message, please be aware that the BRB option volume is not extremely liquid. Please be cognizant of the appropriate price you might pay for your BRB call (hedging in the case that USD strengthens and BRL weakening your original BRL investment)
SM
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