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Answer: Take a short position in the futures because rising interest rates lead to declining futures prices.
Government bond futures decline in value when interest rates rise, so the housing corporation should short futures to hedge against rising interest rates. When interest rates rise, bond prices fall, and since bond futures are based on bond prices, they also decline in value. By taking a short position, the corporation can profit from the declining futures prices, which offsets the losses from rising interest rates in their actual operations or financing costs.
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A German housing corporation needs to hedge against rising interest rates. It has chosen to use futures on 10-year German government bonds. Which position in the futures should the corporation take, and why?
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.
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