A bond portfolio manager has a $25 million market value bond portfolio with a 6 year duration. The manager believes interest rates may increase 50 basis points. Which of the following could be used to help limit his risk?
I. Sell the bonds forward.
II. Buy bond futures contracts.
III. Buy call options on the bonds.
IV. Buy put options on the bonds.

Question

A bond portfolio manager has a $25 million market value bond portfolio with a 6 year duration. The manager believes interest rates may increase 50 basis points. Which of the following could be used to help limit his risk? 
I. Sell the bonds forward.
II. Buy bond futures contracts.
III. Buy call options on the bonds.
IV. Buy put options on the bonds.

Quizplus · Accepted Answer

To limit risk from rising interest rates, a bond portfolio manager can sell the bonds forward or buy put options on the bonds. Selling the bonds forward locks in the current price, protecting against value loss from rising rates. Buying put options provides the right to sell at a predetermined price, also offering protection against a decline in bond prices due to rising rates.

A Bond Portfolio Manager Has a $25 Million Market Value