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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** reduces exposure to rising interest rates because it has a **positive value when rates rise**. A long position in fixed-income securities loses value when market rates increase, so taking the opposite duration exposure through a pay-fixed swap helps hedge that risk. Why the other choices are incorrect: - **B**: Receive-fixed/pay-floating would **increase** exposure to rising rates, not reduce it. - **C**: A long Treasury futures position is also exposed to rates, but a **short** futures position would be the more direct hedge against rising rates. - **D**: A call option on Treasury futures is a bullish position and does not hedge against rising rates. Therefore, the correct hedge 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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