The advantage of hedging an interest rate exposure with interest rate options is:

Question

Quizplus · Accepted Answer

With interest rate options, the benefit of a favourable rate movement is not forgone as the holder has the right but not the obligation to exercise the option. This flexibility allows for greater protection against interest rate risk while still allowing for potential gains if interest rates move in the desired direction. Choices A and B are incorrect as options do not lock in a forward rate. Choice C is incorrect as the cost of options can vary and may not always be lower than futures.

The Advantage of Hedging an Interest Rate Exposure with Interest