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NEW QUESTION: 1
A bond manager holding $1m long in a bond portfolio is concerned that interest rates might rise over the next three months. Which of the following represents the best hedging strategy for the manager?
A. Sell bond futures so that the market value of the futures contracts matches that of the bonds he holds
B. Buy bond futures so that the notional value of the futures contracts matches that of the bonds he holds
C. Sell bond futures so that the dollar duration of the futures contracts matches that of the bonds he holds
D. Sell bond futures so that the notional value of the futures contracts matches that of the bonds he holds
Answer: C
Explanation:
Explanation
The duration matched hedge is the best hedge for the bond manager. Matched durations in the bond portfolio and the hedge positions will ensure that any decline in the bond portfolio due to interest rate changes is matched by a rise in the futures position. Hedging dollar-to-dollar will not work unless the bonds and the futures contracts are identical in duration terms. For example, if the duration of the portfolio is 7 years, and each futures contract has a duration of 3.5 years, then selling $1m in value will only cover half the risk. Choice
'b' is the right answer.
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wahr?
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