Q&A Test 6 (Part 1)
According to suitability rules, 1035 exchanges should occur not more frequently than once every:
1035 exchanges which occur within 36 months of previous exchanges may be considered churning and unsuitable. In order for an exchange of one variable annuity for another to be suitable, an adequate analysis of the investor's situation should include: • Age • Annual income • Financial situation and needs • Investment experience and objectives • Intended use of the deferred variable annuity • Investment time horizon (not intended for senior citizens) • Existing assets • Liquidity needs • Liquid net worth • Risk tolerance • Tax status
Advertising for municipal fund securities investments must be approved prior to its official use by:
A 529 College Savings Plan is a type of municipal fund security. All advertising regarding municipal securities and municipal fund securities must be approved by a municipal securities principal of the firm prior to its initial use.
A registered representative services a joint tenants with right of survivorship account for a married couple, but also maintains an account for their adult son. The RR received a phone call from the couple's son informing her that his father has died. As part of helping his mother sort out the many details associated with his father's death, the son requests that the assets in the account be transferred to an account established in his mother's name only. In order to transfer the account, the firm must first receive:
A death certificate serves as proof of death before transferring an account. Although the transfer will proceed and probate will be avoided, a notarized copy of the death certificate must first be received by the broker-dealer that carries the account. A will is not required since the survivor is now the owner of the account.
Which of the following descriptions characterizes leveraged exchange-traded funds (ETFs)?
A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the DJIA seeks to deliver three times the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. Choice (a) is a regular ETF, choice (c) is an inverse ETF which seeks to deliver the opposite of what it is tracking, and choice (d) is a leveraged inverse ETF.
A member firm is required to send duplicate account statements to FINRA:
A member firm is required to send duplicate account statements to FINRA when a customer of the firm is an employee of FINRA. The member firm would need written instructions from the employee of FINRA when opening an account in order to send the duplicate account statements.
A customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share, which of the following statements is TRUE?
A short margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued.
Which of the following issues will most likely have a mandatory sinking fund?
A term bond issue is one in which all of the bonds mature in one specific year. In order to accumulate the funds that may be used to help retire the bonds, the issuer will deposit funds (above the amount that is used to pay interest) in a sinking fund. These funds will generally be used to retire some (if not all) of the bonds prior to maturity. A serial bond issue is one in which a portion of the bond offering is paid off each year.
Which of the following direct participation programs has the highest profit potential?
A wildcatting program, also called an exploratory program, searches for oil in unproven areas. Although it is considered the riskiest type of oil and gas program due to the high rate of failure, if oil is found, it has the highest profit potential. This is due to the lower cost of acquiring the land. A development program drills for oil in proven, surveyed sites and the cost for the land is greater. Equipment leasing programs and low-income housing are designed to generate income and have the potential for tax benefits.
A new municipal bond issue has a dated date of January 1 and pays interest each April 1 and Oct. 1. An investor purchased bonds from the issuer with a Thursday, January 31 settlement date. How many days of accrued interest does the investor owe?
Accrued interest on a new municipal issue is calculated from the dated date up to, but not including the settlement date. Since the investor's settlement date was January 31, he owes accrued interest from January 1 to January 30 (30 days). The buyer of a new issue must pay the issuer interest that accrues between the dated date and the settlement date, in addition to the principal amount purchased.
A shareholder is long 5,000 shares of XAM stock and has written 20 XAM call options. If XAM makes a tender offer to purchase shares of its stock, the shareholder may tender:
An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. If a shareholder has written call options positions against the long stock, the options positions will reduce his net long holdings in the stock. 20 call options are equal to 2,000 shares (20 calls x 100 shares). This customer is net long 3,000 shares (5,000 - 2,000).
Ms. Thomas calls her registered representative with an order to buy up to 2,000 shares of XYZ at $35 per share right now and do not leave the unexecuted portion as a day or open order. Ms. Thomas has entered a(n):
An order that dictates to fill as much of the order as you can right now and cancel the rest is called an immediate-or-cancel order. Limit orders are placed as either day or GTC orders and the unexecuted portions are placed on the designated market maker's book.
Many investors prefer to receive variable annuity payments under the straight-life payout option because this option:
Annuitants will receive the greatest cash flow from the straight-life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout.
Sarah would like to help fund her 10-year-old niece's future education. Which of the following choices is her best option?
Anyone may set up or deposit funds in a Coverdell Education Savings Account as long as the total amount deposited from all parties does not exceed $2,000 in any one year. Individuals without earned income may not contribute to an IRA. A minor may not participate in a joint account.
If a company pays a cash dividend, which of the following is TRUE?
As it relates to the payment of a dividend, the funds being paid out come from the corporation's cash (a current asset). It is important to distinguish the difference in the treatment of a dividend being declared compared to a dividend being paid. When a company declares a cash dividend, dividends payable (a current liability) will be increased by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. Regardless of the specific corporate transaction, the balance sheet must remain balanced.
A customer has $350,000 to invest and would like to hold a diversified portfolio of stock, bonds, and money-market instruments. She wants the percentage invested in each of these asset categories to be adjusted as financial markets change. However, her business keeps her too busy to adequately monitor her holdings and make the appropriate changes. Which of the following investments are MOST suitable for this customer?
Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.
A registered representative who fraudulently violates an MSRB rule may be disciplined by which TWO of the following organizations? I.The MSRB II.FINRA III.The CFTC IV.The SEC
Both the SEC and FINRA may discipline a registered representative employed at a broker-dealer for fraudulent securities activities. The MSRB has no enforcement power and the Commodity Futures Trading Commission (CFTC) regulates the commodity and futures markets.
A customer may contribute money to an IRA based on which of the following sources?
Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.
Which of the following statements is NOT TRUE regarding an equity-indexed annuity (EIA)?
Equity-indexed annuities (EIAs) are a type of fixed annuity that provide a guaranteed minimum rate of return (unlike variable annuities), but may potentially provide a greater rate of return. An EIA's return is tied to the performance of a stock market index to which it is linked. As with standard annuities, they also provide tax-deferred growth. However, EIAs are not currently considered securities; instead, they are categorized as a life insurance product.
A call option is covered by all of the following choices, EXCEPT:
For a call option writer to be considered covered, the writer could own 100 shares of the underlying stock, have an escrow receipt, or own bonds convertible into at least 100 shares of the underlying stock. Since the writer's obligation is to deliver stock if the option is exercised, a short position would not cover a call.
Your firm is the managing underwriter of an initial public offering. How many days must the firm's research analyst wait before issuing a research report on this IPO?
If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 10 days following an IPO or three days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 10 days.
An investor purchases 200 shares of STC at $35 and subsequently purchases 2 STC Jan 35 puts at 2. At what market price must STC trade for the investor to have a profit?
If an investor is long stock and long a put, he will have a profit if the market price exceeds the cost of his stock plus the premium for the option. The stock must trade above 37 (35 cost + 2 premium).
Interest rates had been very high. During the past three years rates have decreased dramatically, reaching historically normal level. The present yield curve would most likely be: I. Ascending II. Inverted III. Positive sloping IV. Negative sloping
If rates have declined for the past three years and reached a normal level, the present yield curve would most likely be ascending, which is also referred to as positive or upward sloping. This type of curve would have short-term rates lower than long-term rates, which is the way interest rates usually are. It is also referred to as a normal yield curve.
A company in Japan will be importing California wines. The company must pay in U.S. dollars and is, therefore, concerned that the U.S. dollar will appreciate in value. To provide protection in the event that the U.S. dollar does appreciate, the company can buy:
If the U.S. dollar appreciates, the value of the yen declines. Therefore, the company should buy puts on the yen. The company cannot buy U.S. dollar calls since there are no options on the U.S. dollar (trading on an options exchange in the United States). If the expectation is that the U.S. dollar will decline, the company could buy yen calls.
A customer buys a premium bond that is callable. Which of the following is LEAST beneficial for the customer?
If the bonds are called in five years at par, the premium paid for the bond will be amortized over the shortest period. This results in the investor realizing a lower yield than if the bond were called after a longer period. It is important to note that rules require a firm to disclose to a customer the lowest possible yield that the customer can realize. On a premium bond (as in this example), the lowest yield will result from the bond being called at par in the shortest period.
On June 5, 2013, an investor purchased 100 shares of ABC at 20. On November 10, 2013, he purchased an additional 100 shares of ABC at 12. On January 20, 2014, he sold 100 shares of ABC at 15. For tax purposes, he would have reported a:
In this question, the investor has two positions in ABC stock. Each was purchased at different times and at different prices. When selling a portion of his holdings, unless the investor identifies (on the order ticket) the specific shares he is selling, the Internal Revenue Code requires the use of the FIFO method. Since the investor did not identify the shares sold, it is assumed that the first shares purchased (at 20, in June) were the shares sold. Therefore, the investor would have reported a loss of $500 in 2014.
According to MSRB rules, which of the following statements is TRUE regarding a secondary market joint account?
Members of a secondary market joint account must publish the same offering price.
The most detailed financial information regarding a municipal securities issuer is found in the:
Municipal securities are exempt from the registration provisions of the SEC. Therefore, a registration statement and prospectus are not required. Municipal issuers voluntarily provide the same financial information that would be found in a prospectus. This detailed financial information is found in the official statement. The notice of sale contains information pertaining to a competitive offering of bonds such as the time, place, date of sale, and type of offering.
Level I of Nasdaq indicates the:
Nasdaq Level I provides subscribers with the highest bid and the lowest offer (i.e., the inside market) for a security that has at least two market makers; however, the actual market makers are not listed. Level I does not display the cumulative trading volume or the prices of the transactions as they occur. Although non-members firms can also subscribe to Nasdaq Level I, it is typically used by the branch offices of member firms.
Which of the following securities are guaranteed by the federal government?
Of the choices given, only Ginnie Mae securities or the Government National Mortgage Association securities (GNMAs) are fully guaranteed as to principal and interest by the federal government.
Which of the following securities may not be used as collateral in a margin account?
Option contracts have no loan value and therefore may not be used as collateral in a margin account. The exception is LEAPS, which can be bought on margin and, therefore, have loan value. LEAPS are equity options that can have a maximum life of 39 months.
Which TWO of the following actions may an RR engage in when selling shares of a mutual fund? I. Tell a customer to invest in a family of funds to take advantage of a breakpoint II. Sell dividends III. Explain that the exact value can be determined at redemption IV. Allow a customer to sign a letter of intent two months after his initial investment
Selling dividends means to suggest purchasing shares just prior to the ex-date and is a violation of securities rules since it does not benefit the investor. A letter of intent may be backdated up to 90 days. When redeeming shares, the price is based on the next calculated NAV so it is not known at the time of redemption. A family of funds allows an investor to take advantage of breakpoints although investing in more than one fund.
A fundamental analyst is NOT interested in which TWO of the following metrics?
Short interest and trading volume are technical indicators. EPS and the P/E ratio are fundamental indicators.
On the NYSE, an investor enters an order to buy 400 shares of HRJ at $56 per share. Which of the following statements is TRUE regarding this order?
Since the order specifies a price, it is a limit order. A limit order may be executed at the limit price or better. In this question, the investor is wants to buy HRJ at $56 or lower (i.e., the order is not required to be executed at exactly the limit price). Since the order does not indicate an all-or-none (AON) qualifier, a portion of the order may be filled. Also, since the order does not indicate an immediate-or-cancel (IOC) qualifier, it is not required to be executed immediately. As for choice (d), an order is not required to be executed at $56 for this order to receive execution.
Which of the following is NOT TRUE about stopping stock on the NYSE?
Stopping stock is done by the designated market maker (specialist) and involves guaranteeing a price for a public order. The designated market maker is permitted to stop stock without the permission of an exchange official.
An investor is in the 28% tax bracket. Which of the following investments will afford him the BEST after-tax yield?
The 5% municipal bond will offer the best after-tax yield because the interest income is completely free from federal income taxes. The other investments are types of corporate debt subject to federal income taxes and 28% of the income received will be taxable. The taxable equivalent yield of the 5% municipal bond is 6.94%. This is calculated by dividing the 5% municipal yield by the complement of the tax bracket which is 72%. The result is greater than the other choices.
The Bond Buyer Municipal Bond Index is based on:
The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.
Regarding a company's financial statements, total assets are equal to:
The balance sheet formula is Total Assets = Total Liabilities + Stockholders' Equity. Total Assets is, therefore, equal to Total Liabilities + Stockholders' Equity.
List the order of priorities that you would follow when opening an options account for a customer. I. Have the customer sign the options agreement II. Have the registered options principal approve the account III. Send the customer an Options Clearing Corporation risk disclosure document IV. Enter the order
The customer needs to receive the Options Clearing Corporation risk disclosure document at or before the time the account is approved for options trading. The registered options principal then approves the account for options trading. Orders may then be entered. Finally, the customer has 15 days from the time the account is approved for options trading to sign the options agreement.
Which TWO of the following statements are TRUE concerning the death benefit on a variable annuity?
The death benefit on a variable annuity skips the probate process. Probate is a lengthy legal process in which the decedent's bills are paid and remaining assets distributed based on instructions generally left in a will. The recipient of a death benefit from a variable annuity may need to pay taxes on any amount above the contract's cost basis. For example, if a client invested $100,000 and died when the contract was worth $150,000, a nonspouse beneficiary may be required to pay taxes on the $50,000 above the decedent's contributions.
Which TWO of the following metrics can be calculated by examining the balance sheet of a company? I.The debt-to-equity ratio II.The operating profit margin III.The bond coverage ratio IV.The current ratio
The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The current ratio is found by dividing the current assets by the current liabilities. The operating profit margin and the bond coverage ratio can be calculated by examining the income statement.
Public orders on a designated market maker's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63. If the designated market maker wanted to bid for his own account, what is the lowest price he may bid for the stock?
The designated market maker must buy and sell for his own account (acting as a dealer) to make the market fair and orderly. He must be a buyer when there are no buyers and be a seller when there are no sellers. By so doing, he narrows the spread between sales. The DMM may not compete with an order on his book (a public order) at the same price and must always bid higher and offer lower than orders on his book. There is a bid of 42.25 on his book. He must bid at least one cent higher than 42.25, which is 42.26.
A CDSC is associated with which share class?
The differences in mutual fund share classes represent the method by which a fund collects any applicable sales charge. Class A shares typically have a front-end load, which is assessed at the time that a customer purchases the shares. On the other hand, Class B shares have a back-end load, which is assessed at the time a customer redeems the shares. On B shares, if the back-end load declines over time based on how long an investor owns the shares, it is referred to as a contingent deferred sales charge (CDSC). Class C shares may assess a small front-end load, but always have a 12b-1 fee. The 12b-1 fee is an annual fee that is levied in each year that an investor owns the shares.
Which of the following statements is TRUE regarding stock index options?
The exercise of a stock index option is settled by cash instead of the delivery of securities. An index will not be affected if one of its components should split. Some index options are American style (may be exercised any day up to expiration), while others use the European style (may only be exercised on the last trading day prior to expiration). Stock index options have a monthly expiration cycle.
A customer enters a sell stop-limit order for 100 XYZ at 25.50. XYZ trades occur as follows: 25.50, 25.25, 25.13, 25.45. The customer's order was:
The first trade listed at 25.50 touched the stop price of 25.50 and, therefore, the order became an active (triggered) order to sell 100 shares of XYZ at a limit price of 25.50 or better. For the order to be executed, the stock must be traded at 25.50 or higher. Since the stock remained below 25.50 after the order was triggered, the customer's order did not receive execution.
The largest portion of the underwriting spread in a new municipal securities issue is the
The largest portion of the underwriting spread in a municipal securities issue is the total takedown, which is made up of the additional takedown plus the concession.
The maximum underwriting compensation for selling limited partnerships in public offerings is:
The maximum underwriting compensation for selling partnership units in a public offering is 10%. This is based on the gross dollar amount of the units sold. The 10% limit applies to all compensation, regardless of the source, if it is in connection with the offering.
A customer has a long margin account with the following securities in the account. (Assume a 50% FRB initial margin requirement
The minimum maintenance requirement states that the equity must equal at least 25% of the market value of the securities in the account. This equals $3,000. (25% of $12,000 = $3,000.)
Mr. Jones requests that his securities be held in street name. To honor his request, the broker-dealer must:
The only requirement for holding securities in street name is that they must be segregated. A customer signs a margin agreement and hypothecation agreement only when opening a margin account.
Which of the following CMOs has the LEAST prepayment risk?
The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields.
A customer wishes to buy stock in a closely held corporation with a small amount of outstanding shares. The registered representative should advise him:
The registered representative should inform the customer of the risks involved in buying thin issues because of the probability of wide price fluctuations (volatility) and because of the small amount of the shares outstanding.
Money put aside on a municipal revenue issue for the betterment and improvement of the facility is placed in the:
The renewal and replacement fund holds monies put aside for the improvement of the facility.
A brokerage firm's research department has issued a buy recommendation for XYZ Corporation's common stock. The report need not contain which of the following information?
The report must contain all of the items listed except the number of shares of the stock the firm owns. The firm does need to disclose that it owns shares of the stock, but not the actual number.
A customer is considering writing an XYZ April 90 put for an $8 premium but is concerned about the risk of a large loss. Which of the following positions, when added, provides the BEST protection?
The short put position has a maximum risk of $8,200 if the stock declines to zero. If, in addition, the customer buys an XYZ April 80 put for 2, it becomes a credit spread. The maximum risk is reduced to $400, which is the difference between the strike prices (10) and the net premium received (6).
When analyzing the credit strength of a municipal issuer, consideration should include which TWO of the following factors? I. The condition of the U.S. economy II. The current financial status of the municipality III. Money supply figures IV. The general capability of the fiscal officers of the municipality
The state of the local economy (not the U.S. economy) is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt and this must be understood in the analysis. The current financial status is also important to determine the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board are not relevant with regard to the credit strength of a municipality.
The term opening sale applies to a:
The term opening sale applies to the seller (writer) of a listed option. This designation must be written on the order ticket.
An investor buys an STC May 30 call @ 8 and sells an STC May 40 call @ 2. The investor's maximum potential loss is:
This is a debit spread since the investor paid a net premium of $600. The maximum potential loss for a debit spread is the net premium ($600).
A client has a margin account in which she is long and short 1,000 shares of the same security. Based on this position, if the current market value of the stock is $80 per share, the client is permitted to borrow up to:
This is a tricky question and the answer is based on the margin maintenance requirement of a short against the box position. If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000. Choice (c) which is $40,000 (the Reg. T requirement of $80,000) is incorrect since it fails to take into account the client's total position.
ABC Corporation has issued a call notice on its 5% convertible preferred stock. The preferred stock, which is convertible at $20, is being called at $110 and is currently trading at $111. If ABC's common stock is currently trading at $23, what should an RR recommend to an investor who holds the preferred stock?
To determine the best choice for the investor, let's evaluate each possibility separately. 1. The preferred stock may be converted into five shares of common stock ($100 par value ÷ $20 conversion price). The five common shares may then be sold at the market price of $23, which provides the investor with a total of $115. 2. If the stock is sold, the investor will receive the current market price of $111. 3.If the stock is called, the investor will receive the call price of $110. 4. The investor is not able to continue holding the preferred stock since it is being called. By converting and selling the common stock, the investor will be provided with the greatest amount of proceeds.
Your client owns a convertible bond that has been called at 104. The bond is convertible at 40 and is selling in the market at 107. The common stock is selling in the market at 41. Which of the following choices is the LEAST attractive alternative to the client?
To find the conversion ratio, divide the par value of the bond by the conversion price ($1,000 divided by 40 = 25). The common stock is selling at $41. Converting the bond to common stock and selling the stock gives the client $1,025 (25 shares x $41 = $1,025). Since this is less than the client will receive by selling the bond ($1,070) or allowing the bond to be called ($1,040), it represents the least attractive alternative.
Under Rule 144A, a registered representative is NOT permitted to sell unregistered securities to which of the following?
Under Rule 144A of the Securities Act of 1933, unregistered securities may be resold only to qualified institutional buyers (QIBs). Qualified institutional buyers are entities that have at least $100 million of investable assets. The term institution includes insurance companies, investment advisers, investment companies, employee benefit plans, or other types of institutional investors. Individual investors, even if they are deemed to be accredited investors, are not considered to be QIBs.
Upon written request, duplicate account statements would be required under which TWO of the following circumstances? I. The customer is an employee of a member firm and is opening a brokerage account at a bank II. The customer is an employee of a mutual fund and is on the board of directors III. The customer is an employee of a bank and is opening an account at a broker-dealer IV. The customer is an employee of a member firm and is opening a brokerage account at a financial institution
Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens a brokerage account at another member, investment adviser, bank, or other financial institution. There is no requirement to send duplicate statements if the customer is an employee at a financial institution.
An uncle is the custodian for a nephew's account. When the nephew reaches majority, the uncle:
When the nephew reaches majority, the uncle must transfer all the securities in the account to the nephew.
An investor writes an uncovered ABC March 45 put for a premium of 4. At expiration, ABC is at $36 per share and the put option is exercised. If the stock is immediately sold by the writer at the current market price, what is the writer's profit or loss?
When the stock is put to the writer, he must buy the stock for $4,500. His cost basis for tax purposes is $4,100 ($4,500 strike price - $400 premium received). Since he sold the stock for $3,600, he has a net $500 loss ($4,100 - $3,600).
An investor that wants to hedge a portfolio of preferred stocks can buy:
Yield-based options are based on the yield-to-maturity of Treasury bonds, rather than the price of Treasury bonds. Essentially, yield-based calls will increase in value as bond prices fall because of the inverse relationship between yield and price. As is true for bond prices, preferred stock prices are inversely related to the movement of interest rates. An investor who wants to hedge its preferred stocks is worried that the prices will decline and that interest rates and yield-to-maturity on bonds will rise. An investor who fears that yields will rise should buy the option that gains value due to an increase in yields. The best hedge for the investor is to buy yield-based call options.
An investor who expects interest rates to rise will profit by:I.Buying yield-based calls II.Buying yield-based puts III.Selling yield-based calls IV.Selling yield-based puts
Yield-based options are cash-settled options based on the movement in yield on a particular Treasury security. If an investor expects yields (interest rates) to rise, he will buy calls or sell puts.
