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Answer: Enter into a 10-year receive-fixed and pay-floating interest rate swap.
## Explanation When interest rates rise: - The value of the long 10-year Treasury note position decreases - The portfolio manager needs a hedge that will gain value when rates rise **Option B (receive-fixed and pay-floating interest rate swap)** is the correct hedge because: - When rates rise, the floating payments increase while the fixed payments remain the same - This creates a positive value for the swap position - The gain from the swap offsets the loss from the long Treasury position **Why other options are incorrect:** - **Option A**: Pay-fixed and receive-floating would lose value when rates rise - **Option C**: Long position in Treasury futures would also lose value when rates rise - **Option D**: Call option on Treasury futures would lose value when rates rise (as bond prices fall)
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The yield curve is upward sloping and a portfolio manager has a long position in 10-year Treasury notes funded through overnight repurchase agreements. The risk manager is concerned with the risk that market rates may increase further and reduce the market value of the position. What hedge could be put on to reduce the position's exposure to rising rates?
A
Enter into a 10-year pay-fixed and receive-floating interest rate swap.
B
Enter into a 10-year receive-fixed and pay-floating interest rate swap.
C
Establish a long position in 10-year Treasury note futures.
D
Buy a call option on 10-year Treasury note futures.
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