CFAI 2015 Mock Q21

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kjames05

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Bixby wants to protect against rising interest rates. Why would he use a protective put?
 
When interest rates rise, bond values will fall and Bixbie wants to protect against this. You want to reduce the duration of a portfolio.
receive fixed, pay floating will increase the duration.
Put options have negative delta thus going long puts will reduce the duration.
The puts will protect on the downside but will retain the upside potential if the forecast is incorrect.
Covered call does not protect on the downside. It is return enhancement tool if you think the market is going to remain stable.
 
harshd wrote:
When interest rates rise, bond values will fall and Bixbie wants to protect against this. You want to reduce the duration of a portfolio.
receive fixed, pay floating will increase the duration.
Put options have negative delta thus going long puts will reduce the duration.
The puts will protect on the downside but will retain the upside potential if the forecast is incorrect.
Covered call does not protect on the downside. It is return enhancement tool if you think the market is going to remain stable.
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The paragraph refers to using interest rate options. A protective put on interest rates will benefit if interest rates fall, not rise
 
Wait, maybe not. It says “he could use interest rate swaps or options.” I guess they are referring to options on price and not interest rates. Gotta love getting screwed over on poor wording.
 
I’m probably glossing over something but doesn’t entering into a swap (rec fixed pay float) alter portfolio duration?
 
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