Hi David
I got confused with the explanation of DV01 hedge by
1. Writing call option
2. Long on zero coupon bond
If rates decline, value of call option would decline. It should not affect the option writer adversly.
Infact it might be better for the writer as that chances of option getting exercised is less.
And rates decline would raise price of the bond.
So effectively this combination does not produce a good hedge.
Am I missing something here
Thanks
Atin
I got confused with the explanation of DV01 hedge by
1. Writing call option
2. Long on zero coupon bond
If rates decline, value of call option would decline. It should not affect the option writer adversly.
Infact it might be better for the writer as that chances of option getting exercised is less.
And rates decline would raise price of the bond.
So effectively this combination does not produce a good hedge.
Am I missing something here
Thanks
Atin