A bond portfolio manager has a $25 million market value bond portfolio with a six-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

Quizplus · Accepted Answer

Selling the bonds forward would lock in an interest rate now and may limit upside potential. Buying bond futures contracts or put options on the bonds would protect against rising interest rates by allowing the manager to sell the bonds at a higher price if rates increase, while buying call options on the bonds would not provide downside protection if rates decrease. Therefore, options would not be the best choice, and the most effective strategy would be to buy put options on the bonds or selling the bonds forward.

A Bond Portfolio Manager Has a $25 Million Market Value