What kind of an option should you purchase if you anticipate buying $2 million of Treasury bonds in one year’s time and wish to hedge against the risk of interest rates rising?
a. You could purchase a put option that gives you (as the holder) the right but not the obligation to sell the bonds at a price determined today. Therefore, if interest rates rise and the price of the bonds rises, you can exercise the option and sell the bonds at the predetermined price.
b. You could purchase a put option that gives you (as the holder) the right but not the obligation to sell the bonds at a price determined today. Therefore, if interest rates rise and the price of the bonds falls, you can exercise the option and sell the bonds at the predetermined price.
c. You could purchase a call option that gives you (as the holder) the right but not the obligation to buy the bonds at a price determined today. Therefore, if interest rates fall and the price of the bonds rises, you can exercise the option and buy the bonds at the predetermined price.
d. You could purchase a call option that gives you (as the holder) the right but not the obligation to sell the bonds at a price determined today. Therefore, if interest rates rise and the price of the bonds rises, you can exercise the option and sell the bonds at the predetermined price.