CFAI mock 2016 PM - question 54

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matteobona88

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Hey guys, relative to this question I do not understand why strategy 1 is a seagull spread short. So I understand that we have two shorts, but the put actually is not OTM, but it is ITM. Can I call it a seagull spread anyway? Then it seems that in the 2,1046 - 2,1356 zone it is not really an hedge, but there is also some upside (summing the payoffs it makes 2ST - 2,1356, which is sure to be positive: is it protection zone?).
Regarding the correct seagull that could exploit market views, would a correct structure be: SHORT put strike 2,0355, LONG put strike 2,1046 and SHORT call 2,1456?
 
I try to restate the question because I really need help with this one.
We are a Brazilian fund and we are long the AUD. The spot rate today is 2,1046, the 6m forward rate is 2,1523 and the expected 6m spot rate is 2,0355 (all in BRL/AUD). A consultant proposes this strategy to exploit market views: long a put strike 2,1056; short a put strike 2,1356; short call strike 2,1456.
Now CFAI says that hedge is neutralized at 2,1356 becuase the short put kicks in. Actually it seems to me that we are hedged until 2,1456, from 2,1356 to 2,1456 we have the return of the underlying, from 2,1056 to 2,1356 we have a double effect of 2*underlying - 2,1356, and from 2,1056 down we have the return of the underlyig again.
It is clear that the structure is not correct, but
1) I do not understand why we have no more hedge at 2,1356
2) let’s suppose I want to hedge correctly with a short seagull spread. In this case I would: short put strike 2,0355; long a put 2,1046; short a call whatever the price to finance the cost of the long put. Does it work?
 
hi Matteobona88, strategy 1 satifsy the definition of “seagull spread” by adding a put spread and short a call. I also notice it’s odd because the put spread should be long a put at higher strike price than the put short further OTM. It’s not the case here.
About this question, i think we neither of the two strategies are good in terms of hedging as they didn’t onsider the market view.
 
It remains a mystery to me … seagull is not exactly a collar strategy, it is a long put + short put + short call (short seagull spread): it is similar but leaves some downside risk
 
Don’t remember bumping into this.
The short put has a lower strike price I presume.
 
It should but in the stated example it did not have, this is why I got into confusion
 
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