Problem: Because of your impending MBA, you are the chair of the pension committee at the hospital where you work. It's a small, young hospital with a $40 million pension account-50% invested in an international bond index fund, and 50% invested in a S & P 500 index fund. Your economics/financial consultant expects a rise in interest rates and constant stock prices during the next two years.
1. Cite a strategy using derivatives to hedge against the possible rise in interest rates.
2. Explain how covered calls (long calls) can be used to create additional income on the equity portfolio during periods when the market is flat, i.e., cyclically constant stock prices.