The investment guidelines of the Wycoff Pension Fund prohibit the fund's external bond managers from using options in any capacity. At a meeting between the trustees of the Wycotf Pension fund, its consultant, and one of its external portfolio managers, the issue of relaxing this restriction was discussed.

One trustee agreed that its external managers should be permitted to use options. However, the trustee was adamant that the manager only be allowed to write options on bonds in the portfolio the trustee felt that in contrast to buying options a strategy of writing call options would not result in a loss to the fund if options expired unexercised, nor would the fund have wasted the option premium. In the case of writing call options, the trustee argued that even if the option is exercised, there is no loss to the fund, because it collected the option premium; besides, it is just taking out of its portfolio a bond that it already owns.

The portfolio manager responded that he was uncomfortable with such a restrictive policy, because it is not a true hedging strategy. Moreover, he believes that there are costs associated with the strategy. The consultant was asked to comment on the statements made by the trustee and the portfolio manager. How should the consultant respond?