I have taken the exam (not passed) and I saw 2 questions about what type of option would an investor choose if interest rates were rising or falling? Are these questions just Yield-based options questions?
Yes, they are. This is the chapter they’re covered in. Yields follow the same path as interest rates; for example, when interest rates rise, bond prices fall, which results in yields rising. Or, another way of saying when interest rates rise, so do yields (and vice versa).
If an investor with a bond portfolio wanted an option to protect them against interest rate risk (rising interest rates), they should go long a yield-based call. Long yield-based calls go “in the money” (gain intrinsic value) when interest rates and yields rise. When the investor’s bonds start losing value, the option gains value, hopefully offsetting those losses.
I hope this helps! Please let us know if we can support you further with your retake.
Perfect, thank you. FYI I was just using Achievable as a supplement and never completed the whole program. So it shouldn’t be counted towards your pass rates
Thanks for clarifying! Good luck on your retake