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 balance sheet conditions can 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? LO.1