Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.

Question

Quizplus · Accepted Answer

When bond prices rise, yields (which are inversely related to bond prices) fall. If a FI buys a call option with a low exercise price and yields do indeed fall, the FI can then purchase the bonds at the lower exercise price and sell them at the higher market price, realizing a profit.

Buying a Call Option (Standing Ready to Buy Bonds at the Exercise