Explanation:
D is correct. Government bond futures decline in value when interest rates rise, so the housing corporation should short futures to hedge against rising interest rates.
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A finance officer of a German residential corporation is concerned about the potential rise in interest rates and aims to mitigate this risk. The officer has chosen to use futures contracts based on 10-year German government bonds as a hedging strategy. In this context, what would be the most appropriate position for the finance officer to take in the futures market?
A
Take a long position in the futures because rising interest rates lead to rising futures prices.
B
Take a long position in the futures because rising interest rates lead to declining futures prices.
C
Take a short position in the futures because rising interest rates lead to rising futures prices.
D
Take a short position in the futures because rising interest rates lead to declining futures prices.