Explanation:
The objective is to reduce exposure to rising interest rates. A long Treasury note position has positive duration: when rates rise, bond prices fall.
A pay-fixed, receive-floating interest rate swap has the opposite sensitivity of a long fixed-income position and can be used as a hedge against rising rates. In effect, this swap position behaves like a negative duration instrument relative to a fixed-rate receiver position.
Why the other choices are wrong:
Therefore, the best hedge is A.
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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.