Suppose your firm invested in a callable bond recently when interest rates were high and the bond has three more years to go before the first call date.If interest rates are expected to fall over the next three years,which of the following is one potential strategy would take advantage of this view.
A)buy a payer swaption
B)sell a payer swaption
C)buy a receiver swaption
D)sell a receiver swaption
E)buy an interest rate floor

Question

Quizplus · Accepted Answer

Buying a receiver swaption would give the firm the option to receive fixed rate payments and pay floating rate payments at a predetermined strike rate. If interest rates fall, the floating rate payments would decrease, resulting in a higher net payoff for the firm. Additionally, if the bond is called, the firm would receive the option premium from the swaption, further increasing their return. Selling a payer swaption or buying an interest rate floor would be bets if the firm expected interest rates to rise.

Suppose Your Firm Invested in a Callable Bond Recently When