A hedge of interest rate risk with a put option completely offsets gains but only partly offsets losses.

Question

Quizplus · Accepted Answer

A put option can protect against losses due to a rise in interest rates, but it comes at a cost (the premium paid for the option). If interest rates do not rise, the investor would not need the insurance and would have to accept the cost of the option. Therefore, gains are not completely offset, only losses are partially offset.

A Hedge of Interest Rate Risk with a Put Option