fullofquestions
New Member
A trader buys a swaption on a 10-year Libor to 5% semianual swap, and, to keep the delta neutral, shorts government bonds. What can be said about the position?
a. Volatility risk remains, as well as basis risk and interest risk (ANS)
b. Interest rate risk is completely eliminated
c. The position is delta-neutral and gamma positive, hence profit is locked
d. Basis risk should first be hedged
a.how is volatility risk different that interest risk here. The swaption and bond are both affected primarily by the interest rate. So how does volatility risk apply here?
b. Can never completely eliminate interest rate risk so I see why this is incorrect.
a. Volatility risk remains, as well as basis risk and interest risk (ANS)
b. Interest rate risk is completely eliminated
c. The position is delta-neutral and gamma positive, hence profit is locked
d. Basis risk should first be hedged
a.how is volatility risk different that interest risk here. The swaption and bond are both affected primarily by the interest rate. So how does volatility risk apply here?
b. Can never completely eliminate interest rate risk so I see why this is incorrect.
