In: Accounting
Suppose that the pension you are managing is expecting an inflow funds of $100 million next year and you want to make sure that you will earn the current interest rate of incoming funds in long-term bonds.
(i) How would you use the options market to accomplish this goal?
(ii) What are the advantage and disadvantage of using an options contract rather than a futures contract?
400 words
(i) You would buy $1 billion worth (10000 contracts) of the call long-term bond option with a delivery date of one year in the future and with a strike price that corresponds to a yield of 5%. This means that you would have the option to buy the long bond with the 5% interest rate, thereby making sure that you can earn 5%.
(ii)
Advantages:
Disadvantages:
Future contract advantages:
Future contract disadvantages: