When interest rates rise, writing a bond call option may cause profits to offset the loss on an FI's bonds held in the portfolio.

Question

Quizplus · Accepted Answer

Writing a bond call option in a rising interest rate environment could potentially lead to the option being exercised by the bond issuer, causing the FI to lose their bonds and miss out on potential future gains. This would not offset the loss on bonds held in the portfolio.

When Interest Rates Rise, Writing a Bond Call Option May