Hi I've sat the ST5 exam but I'm sure I've failed, so I have began studying again already. After reading through the option section last night I started thinking about the protective Put and how if you have a fixed monetary outgoing in the future the notes say it can used to hedge against your assets falling. If my fixed monetary outgoing has been caculated based on LIBOR, can I get a put option on LIBOR to make this work? The notes mention asset values falling, but how do you translate this methodology when talking about rates? Thanks in advance
Sorry to hear that the exam didn't go well for you. Re. your query, I'm not sure that I understand exactly the situation you're trying to describe, since a monetary amount based on LIBOR is by definition not fixed. Perhaps you could have another go at trying to explain the problem? In the meantime, is the section on page 20 of Chapter 22 headed Protecting against interest rate changes any help? Also, recall that you can hedge against interest rate changes using the caps and floors described in Chapter 12 (where a floor was valued by thinking about how it is equivalent to a series of puts on LIBOR).
