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Answer: An interest rate swap paying fixed and receiving LIBOR plus a spread
**Explanation:** **Negative duration** means the security's value decreases when interest rates fall and increases when interest rates rise. - **Option C (Paying fixed, receiving floating)**: When interest rates rise, the fixed payments become less valuable compared to the floating payments that increase with rising rates, so the swap position increases in value. This gives negative duration. - **Option A (Callable bond)**: While call features reduce duration, the overall duration remains positive as bond prices still rise when rates fall. - **Option B (Putable bond)**: Similar to callable bonds, put features reduce duration but don't create negative duration. - **Option D (Paying floating, receiving fixed)**: This position decreases in value when rates rise, giving positive duration - the opposite of what the manager wants.
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A hedge fund manager who holds a portfolio of interest rate-sensitive positions has just received an economist's report forecasting a significant shift in interest rates. Accordingly, the manager wants to change the fund's interest rate exposure by investing in fixed-income securities with negative duration. Which of the following positions should the fund manager take?
A
A long position in a callable corporate bond
B
A long position in a putable 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