(solution) Answer the following: a. What are the two ways to use call and put options on T-bonds to generate…

(solution) Answer the following: a. What are the two ways to use call and put options on T-bonds to generate…

Answer the following: a. What are the two ways to use call and put options on T-bonds to generate positive cash flows when interest rates decline? b. When and how can an FI use options on T-bonds to hedge its assets and liabilities against interest rate declines? c. Is it more appropriate for FIs to hedge against a decline in interest rates with long calls or short puts?