Consider the following: a. What are the two ways to use call and put options on T-bonds

Question:

Consider the following:
a. What are the two ways to use call and put options on T-bonds to generate positive cash flows when interest rates decline? Verify your answer with a diagram.
b. Under what conditions would an FI use options on T-bonds to hedge its assets and/or liabilities against interest rate declines?
c. Is it more appropriate for FIs to hedge against a decline in interest rates with long calls or short puts? Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...