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The correct answer is B. I think all three answers are correct?? All three are able to alter the duration of the portfolio.
I am afraid we don’t have enough information from the case excerpt you provided. What is advisor B’s view on interest rates? If he wants to increase duration because he expects interest rates will move down, then receiving fixed and paying floating would make sense. Otherwise A would be wrong. As for the covered call, I believe that buying a call would increase duration, however writing a call would lower it. Essentially it all goes back to advisor B’s view on interest rates. Which is probably why answers A and C are incorrect in this context.
Oh and to wrap it up, notice that buying a put should lower duration. So if investor B’s view is that interest rates will move up, then answer B is the only right choice.
Yes, the interest rate is expected to rise. Since protective put lowers duration, and covered call also lowers duration.
We can use either of them to lower the duration of portfolio. Isn’t it?
Thank you.
Hahaha ******… you got me scratching my head here… not sure what I’m missing, but yes I agree with you… I went back to my notes and they say “the delta and duration of a call will be positive.” Therefore if I’m selling a call it should lower my duration. And if I think interest rates are going to rise, then that’s appropriate action… can anyone else chime in please? HALP!!!
The problems with using covered calls to shorten the portfolio’s duration is that:
- You may be forced to sell securities that you don’t want to sell (in particular, because they’re increasing in price).
- The call options only shorten the duration on the upside; what you want is to shorten the duration on the downside. The point of shortening the duration is to reduce the loss when interest rates rise; selling calls doesn’t accomplish that.
Awesome, That makes perfect sense. Thank you S2000 
You’re welcome.
I wish I had about an extra 40 hours per day for the next month-and-a-half. I have so many things I want to get done (here, for my classes at school, and on other projects in the works), and not remotely enough time to do them all.
Sigh.
That actually sounds quite hectic. With any luck Elon Musk will have developed his Neural Lace technology by the weekend. At which rate you will be able to output information into productive format straight from your brain cells into a spreadsheet or whatever format your mind envisions… sigh… if only we actually had that right now…
thank you !