Question: Consider an FI that wishes to use bond options to hedge the interest rate risk in the bond portfolio. a. How does writing call options

Consider an FI that wishes to use bond options to hedge the interest rate risk in the bond portfolio.
a. How does writing call options hedge the risk when interest rates decrease?
b. Will writing call options fully hedge the risk when interest rates increase? Explain.
c. How does buying put options reduce the losses on the bond portfolio when interest rates rise?
d. Diagram the purchase of a bond call option against the combination of a bond investment and the purchase of a bond put option.

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a In the case where the FI is long in the bond on the balance sheet writing a call option will provi... View full answer

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