A thrift with a large fixed-rate mortgage portfolio wants to protect itself against an increase in interest rates. It should:
A) Buy Treasury bond futures contracts
B) Sell Treasury bond futures contracts
C) Buy Treasury bill futures contracts
D) Sell Treasury bill futures contracts
E) Buy stock index futures contracts

Question

Quizplus · Accepted Answer

Selling Treasury bond futures contracts can help a thrift hedge against the risk of rising interest rates. When interest rates rise, the value of fixed-rate mortgage portfolios typically falls. By selling Treasury bond futures, the thrift can profit from the futures contracts if bond prices fall (which they tend to do when interest rates rise), offsetting the loss in value of its mortgage portfolio.

A Thrift with a Large Fixed-Rate Mortgage Portfolio Wants to Protect