Answer: Enter into a 10-year pay fixed and receive floating interest rate swap.

A **pay-fixed, receive-floating interest rate swap** is the appropriate hedge. ### Why - The portfolio manager is **long 10-year Treasury Notes**, so the position has **positive duration** and will generally **lose value when interest rates rise**. - A **pay-fixed swap** has **negative duration** from the payer’s perspective, meaning it tends to **gain value when rates rise**. - Therefore, it offsets the bond position’s exposure to rising rates. ### Why the others are wrong - **B** receive-fixed/pay-floating: this is a **long duration** position and would make the exposure to rising rates worse. - **C** long Treasury Note futures: a **long futures** position benefits from rising bond prices, which is the opposite of what is needed. - **D** buy a call on Treasury Note futures: a call would benefit from rising futures prices, again not the desired hedge. ### Key takeaway To hedge a **long fixed-income position** against **rising rates**, you generally want a position with **negative duration**, such as a **pay-fixed swap** or a suitable short futures hedge.

Author: Manit Arora