1. The portfolio you manage expects to buy $5 million of Treasury bonds with 5 years to maturity in six months. To hedge the interest-rate risk on these bonds over the coming year, should you buy call or put options? Explain.
2. A thrift is expecting an unusually large amount of prepayment of mortgage loans in the coming three months. It wants to be sure of earning the current interest rate of 6% when it invests those funds. To hedge the risk, should it buy or sell futures? Explain.