A financial institution has the following balance sheet:

Assets Liabilities

Market value (millions) 120 90

Duration 5 years 8 years

What interest rate exposure does the institution face and if the treasury manager decides to hedge this risk using options on T bond futures, should the manager purchase put or call options?

Select one:

a.

The FI is exposed to rate falls, and the manager should thus purchase call options

b.

The FI is exposed to rate rises, and the manager should thus purchase call options

c.

The FI is exposed to rate falls, and the manager should thus purchase put options

d.

The FI is exposed to rate rises, and the manager should thus purchase put options