Explanation

When interest rates rise, bond prices fall. Since bond futures prices move in the same direction as bond prices, rising interest rates will cause bond futures prices to decline.

A German housing corporation that needs to hedge against rising interest rates (which would increase their borrowing costs) should take a short position in bond futures. Here's why:

• If interest rates rise, bond futures prices will decline
• A short position profits when futures prices decline
• The gains from the short futures position will offset the increased borrowing costs from rising interest rates

This is a classic interest rate hedge where the corporation is protecting against the risk of higher financing costs.

Answer: C (Take a short position in the futures because rising interest rates lead to declining futures prices)