1. The portfolio you manage is holding $5 million of Treasury bonds with a 7% coupon rate and 5 years to maturity with a price of $98 (per $100 face value). To hedge the interest-rate risk on these bonds over the coming year, should you buy call or put options?
2. Suppose that the pension fund you are managing is expecting an inflow of funds of $15 million next year and you want to make sure that you will earn the current interest rate of 6% when you invest the incoming funds in long-term bonds. How would you use the futures market to do this?
3. A thrift is planning to buy Treasury securities next month. To hedge the risk, should it buy or sell futures contracts? Explain.