CFA Practice Question
A trader expects an increase in the volatility of interest rates. Which one of the following trades should he not undertake?
A. Buy a bond with a put option.
B. Buy a bond with a call option.
C. Purchase interest rate puts.
Explanation: The value of the call option will increase. The call option is owned by the issuer.
User Contributed Comments 2
| User | Comment |
|---|---|
| YNWA | why not C? if you purchase interest rate puts.If interest rate starts to increase you are going to loose . even though with B you will loose more with higher interest rate. |
| GBolt93 | generally the value of options increases with volatility since you only own the upside. However with the call option, the issuer owns the option not you, so increases of value of the option decreases value of bond. |