A member of an investment committee interested in learning more about fixed-income investment procedures recalls that a fixed-income manager recently stated that derivative instruments could be used to control portfolio duration, saying, "A futures like position can be created in a portfolio by using put and call options on Treasury bonds."
a. Identify the options market exposure or exposures that create a "futures-like position" similar to being long Treasury-bond futures. Explain why the position you created is similar to being long Treasury-bond futures.
b. Explain in which direction and why the exposure(s) you identified in part (a) would affect portfolio duration.
c. Assume that a pension plan's investment policy requires the fixed-income manager to hold portfolio duration within a narrow range. Identify and briefly explain circumstances or transactions in which the use of Treasury-bond futures would be helpful in managing a fixed-income portfolio when duration is constrained.