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

Question

Quizplus · Accepted Answer

Buying a call option gives the holder the right, but not the obligation, to buy the underlying asset (in this case, bonds) at the exercise price. If bond prices rise, the call option becomes more valuable, and the holder can profit by exercising the option and buying the bonds at the exercise price. This strategy is often used when interest rates are expected to fall, as bond prices tend to rise in such an environment.

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