The manager of an investment bank that has significant funds on term deposit maturing in two months; his mandate is to re-invest the funds for a further three years, at a deposit rate locked in now. The bank has authorised the manager to pay the required costs to establish such strategy.

Identify the risk exposure(s) and most appropriate hedging instrument.

Select one:

a.Risk exposure: interest rate going down. Can hedge by taking a long position in an interest rate call option (i.e. a cap).

b.Risk exposure: interest rate going down. Can hedge by taking a long position in an interest rate put option (i.e. a floor).

c.Risk exposure: interest rate going down. Can hedge by interest rate swap.

d.Risk exposure: interest rate going up. Can hedge by BAB futures or FRA.

e.Risk exposure: interest rate going up. Can hedge by taking a long position in an interest rate call option (i.e. a cap).