On January 4, 2021, an FI has the following balance sheet (rates = 10 percent)

Assets Liabilities/Equity

A 200m D_A = 6 years L 170m D_L = 4 years

E 30m

Duration Gap = [6 (170/200)4] = 2.6 years > 0

The FI manager thinks rates will increase by 0.75 percent in the next three months. If this happens, the equity value will change by:

The FI manager will hedge this interest rate risk with either futures contracts or option contracts.

If the FI uses futures, it will select June T-bonds to hedge. The duration on the T-bonds underlying the contract is 14.5 years, and the T-bonds are selling at a price of $114.34375 per $100, or $114,343.75. T-bond futures rates, currently 9 percent, are expected to increase by 1.25 percent over the next three months.

If the FI uses options, it will buy puts on 15-year T-bonds with a June maturity, an exercise price of 113, and an option premium of 1 percent. The spot price on the T-bond underlying the option is $135.71875 per $100 of face value. The duration on the T-bonds underlying the options is 14.5 years, and the delta of the put options is -0.75. Managers expect these T-bond rates to increase by 1.24 percent from 7.875 percent in the next three months.

If by April 4, 2021, balance sheet rates actually fall by 0.75 percent, futures rates fall by 1.05 percent, and T-bond rates underlying the option contract fall by 1.24 percent, would the FI have been better off using the futures contract or the option contract as its hedge instrument? Why?