Answer: Interest rates to fall

## Explanation In the Orange County case, Robert Citron invested heavily in inverse floating-rate notes expecting **interest rates to fall**. ### Key Points: - **Inverse floating-rate notes** are structured products whose coupon payments move inversely to market interest rates - When interest rates fall, the coupon payments on inverse floaters increase - Citron's strategy was based on the expectation that interest rates would continue to decline - However, when the Federal Reserve unexpectedly raised interest rates in 1994, the value of these leveraged positions plummeted, leading to massive losses - This case demonstrates the dangers of using leverage with complex financial products and making concentrated bets on interest rate direction The correct answer is **B** - Citron expected interest rates to fall.

Author: Tanishq Prabhu