Hedging the FI's interest rate risk by buying a put option on a bond is an attractive alternative for an FI.

Question

Quizplus · Accepted Answer

Buying a put option on a bond can provide an FI with protection from a potential decline in interest rates and can be an effective hedging strategy. By purchasing the put option, the FI has the right to sell the bond at a predetermined price, which can help mitigate the impact of falling interest rates on the value of the bond. However, it is important to note that buying a put option involves a cost, which can impact the overall return on the investment.

Hedging the FI's Interest Rate Risk by Buying a Put