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Answer: An interest rate swap paying fixed and receiving LIBOR plus a spread
To change the fund's interest rate exposure by investing in fixed-income securities with negative duration, the hedge fund manager should take an interest rate swap paying fixed and receiving LIBOR plus a spread. This is because such a swap will increase in value as interest rates rise, which is the opposite of what a traditional fixed-income security would do, thereby providing negative duration exposure. Callable and puttable bonds, despite having features that can reduce their duration, still maintain a positive duration overall, making options A and B incorrect. Option D is essentially the reverse of option C and would not provide the desired negative duration exposure.
Author: LeetQuiz Editorial Team
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As a hedge fund manager looking to modify your fund's exposure to interest rate movements using fixed-income securities with negative duration, which of the following investment options should you consider?
A
A long position in a callable corporate bond
B
A long position in a puttable corporate bond
C
An interest rate swap paying fixed and receiving LIBOR plus a spread
D
An interest rate swap paying LIBOR plus a spread and receiving fixed
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