Answer-first summary for fast verification
Answer: Take a short position in the futures because rising interest rates lead to declining futures prices.
## 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)**
Author: LeetQuiz .
Ultimate access to all questions.
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 short position in the futures because rising interest rates lead to rising futures prices.
C
Take a short position in the futures because rising interest rates lead to declining futures prices.
D
Take a long position in the futures because rising interest rates lead to declining futures prices.
No comments yet.