Cross Currency Option Hedging (OTM Call + PRS)

As we could foresee the downside pressure on SGD with USD, the recommendation is cross hedging of SGD with JPY.

Step 1: Buy more necked OTM call options of USD/SGD as they are cheaper and signifying smaller Gamma number which means Delta is less sensitive and option price is likely to move in sync with the underlying fluctuations.

Step 2: These necked options would like to be hedged with other pair (i.e. USDJPY) which is a clear downtrend.

Hence, strategy is quite simple, buy OTM Call options of USDSGD and simultaneously buy put ratio spreads of USDJPY pair as well.

In order to execute PRS (Put Ratio Spread), combine Bear Put Spread and naked put option of USDJPY. Buy a Put and sell more Puts at a lower strike price in ratio of 1:2 or 1:3.

A Short time to expiration is preferred to take advantage of time decay in short positions and not to give stock time to move lower.

Margin is required to take short Put positions.