See we know that an option reduces the volatility of a bond. Less volatility means less ED. Since ED measures Volatility.
Imagine the convex graph of price yield relationship. If int rate rises. Value of bond falls. But if it’s an option embedded bond, in this case put option. Think when int rate will rise, price will fall but due to put.otpion the price cannot fall below put price, it means the fall is less than what should have been in case of no otpion.. Therefore options kills volatility.
Answer is option A.
See we know that an option reduces the volatility of a bond. Less volatility means less ED. Since ED measures Volatility.
Imagine the convex graph of price yield relationship. If int rate rises. Value of bond falls. But if it’s an option embedded bond, in this case put option. Think when int rate will rise, price will fall but due to put.otpion the price cannot fall below put price, it means the fall is less than what should have been in case of no otpion.. Therefore options kills volatility.
Hope it helps