H. Using Futures Options to Hedge
... Against Increasing Prime Rates
- 1. Assume same increasing rates.
- 2. Since the Developer seeks protection against rising interest rates he must buy PUT options.
- 3. To establish a HEDGE Position similar to that of the futures example, the Developer buys put options with a strike price of 68 with a premium of 2-16 which is equal to:
- 2 16/64% * $100,000 = $2,250 per contract