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Treasury Issues Options
[By William H. Mears; CPA, JD]
Interest rate options are usually options on Treasury instruments, Treasury bills, notes, and bonds. The face values used are $1 million for Treasury bills and $100,000 for T-notes and bonds.
Purpose
With these options, a physician or other investor will bet on the direction of interest rates. When interest rates decline, the prices of bonds increase. This phenomenon has been experienced in the United States for the most part since the late 1980s. If interest rates increase, bond prices decrease.
Assessment
The value of the underlying security (the bond itself) will determine the value of the option. The investors who believe that interest rates will increase and that bond prices will go down are bearish. As bearish investors, they will buy puts and sell calls. Bullish investors will sell calls and sell puts.
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Conclusion
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