Answer-first summary for fast verification
Answer: Enter into a 10-year pay fixed and receive floating interest rate swap.
A long Treasury note position has positive duration, so it loses value when interest rates rise. To reduce exposure to rising rates, the manager needs a hedge with the opposite interest-rate sensitivity. A **pay fixed / receive floating swap** has negative duration relative to a bond position and offsets the long bond exposure. Why the other choices are wrong: - **B** receive fixed / pay floating increases exposure to rising rates because it behaves more like a long bond position. - **C** a long futures position would also have positive rate exposure, not a hedge against rising rates. - **D** a call option on Treasury futures is not the direct hedge here and would generally add upside exposure rather than offset rate risk. So the correct hedge is **A**.
Author: Manit Arora
Ultimate access to all questions.
Question 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.
No comments yet.