Explain How Option Contracts Could Be Used to Protect Against

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The Answer is Option contracts can be used to protect against losses in portfolio value that may occur as interest rates increase by using interest rate options. These options allow investors to hedge against interest rate risk by providing the right, but not the obligation, to buy or sell a specified amount of a financial instrument at a predetermined price within a specific time period.

For example, if an investor holds a portfolio of fixed-income securities such as bonds, they can purchase interest rate put options. These put options would increase in value as interest rates rise, effectively offsetting the decrease in the value of the bonds in the portfolio. Similarly, if an investor expects interest rates to decrease, they can purchase call options to protect against potential losses in the value of their fixed-income securities.

By using option contracts in this way, investors can mitigate the impact of interest rate changes on their portfolio value. This can provide a level of security and stability, especially in a rising interest rate environment, where the value of fixed-income securities typically decreases. Additionally, using option contracts allows investors to customize their hedging strategies based on their specific portfolio composition and risk tolerance. Overall, option contracts can be a valuable tool for protecting against losses in portfolio value caused by changes in interest rates.

Explain How Option Contracts Could Be Used to Protect Against

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Explain How Option Contracts Could Be Used to Protect Against

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Correct Answer:
Answered by ExamLex AI