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Answer: Enter into a 10-year pay fixed and receive floating interest rate swap.
A **pay fixed / receive floating** interest rate swap is the better hedge against **rising rates** for a long Treasury note position. ### Why - A long Treasury note position loses value when interest rates rise. - A pay-fixed swap generally gains value when rates rise, because the fixed payments become less attractive relative to market rates. - Therefore, it offsets the loss on the bond position when rates increase. ### Why the other choices are not best - **Receive fixed / pay floating** has the opposite exposure: it benefits when rates fall, so it would not be the best hedge against rising rates. - A **long Treasury note futures** position would add further exposure in the same direction as the cash bond. - A **call option on Treasury note futures** is not the standard direct hedge for this rate-risk exposure. So the correct answer is **A**.
Author: Manit Arora
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Q-1. GARP 2010.P1.12. 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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