The Safest Way to Hedge a Bond Asset with Options

question 1

Multiple Choice

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

• A)purchase a call option on the bond.
• B)write a call option on the bond.
• C)purchase a put option on the bond.
• D)write a put option on the bond.

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Definitions:

Compounded Monthly

The calculation of interest on the principal amount where the interest accrued is added to the principal every month, allowing for the accumulation of interest on interest.

Capital Cost

The total acquisition cost of an asset, including the purchase price and costs associated with its acquisition and preparation for use.

Quarterly Compounded Nominal Rate

A nominal interest rate compounded four times a year.

Effective Rate

The annual interest rate that accounts for compounding within the year.