The safest way to hedge a bond asset with options is to

Question

Quizplus · Accepted Answer

The safest way to hedge a bond asset is to purchase a put option on the bond. This allows the holder to sell the bond at a predetermined price if its value drops. By doing so, the holder is protected against the downside risk while still allowing for potential upside gains. Writing a call option (option B) on the bond would require the writer to sell the bond at the predetermined price, which can expose them to unlimited potential loss. Purchasing a call option (option A) on the bond would provide protection against downside risk, but would limit potential profit. Writing a put option (option D) on the bond would require the writer to purchase the bond at a predetermined price, which can also expose them to significant potential loss. Therefore, option C is the safest and most appropriate way to hedge a bond asset with options.

The Safest Way to Hedge a Bond Asset with Options