Explanation:
A pay fixed, receive floating interest rate swap is the appropriate hedge because it tends to gain value when interest rates rise, offsetting the loss in market value of the long Treasury Note position.
A long fixed-income position has negative exposure to rising rates. To hedge that risk, use a position that has the opposite rate sensitivity, such as a pay-fixed swap or a short futures position.
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Question-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.