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The trustees of a pension fund would like to examine the issue of protecting the bonds
in the fund’s portfolio against an increase in interest rates using options and futures.
Before discussing this with their external bond fund manager, they decide to ask four
consultants about their recommendations as to what should be done at this time. It turns
out that each of them has a different recommendation. Consultant A suggests selling
covered calls, Consultant B suggests doing nothing at all, Consultant C suggests selling
interest rate futures, and Consultant D suggests buying puts. The reason for their different
recommendations is that although all consultants understand the pension fund’s objective
of minimizing risk, they differ with one another in regards to their outlook on future
interest rates. One of the consultants believes interest rates are headed downward, one has
no opinion, one believes that the interest rates would not change much in either direction,
and one believes that the interest rates are headed upward. Based on the consultants’
recommendations, could you identify the outlook of each consultant?

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