1. What must happen to interest rates for the purchaser of a put option on a bond to make money? How does the writer of the put option make money?

Consider the following:

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.

Under what balance sheet conditions can an FI use options on T-bonds to hedge its assets and/or liabilities against interest rate declines?

Is it more appropriate for FIs to hedge against a decline in interest rates with long calls or short puts?