An insurance company expects to receive a large payment in three months. When the payment is received, it will be invested in short-term securities. It can hedge against a change in interest rates if it:
A) Buys Treasury bond futures contracts
B) Sells Treasury bond futures contracts
C) Buys Treasury bill futures contracts
D) Sells Treasury bill futures contracts
E) Buys stock index futures contracts

Question

Quizplus · Accepted Answer

DBuying or selling Treasury bill futures contracts can hedge against interest rate changes for short-term investments. Buying futures (C) would protect against rising rates, while selling futures (D) would hedge against falling rates.

An Insurance Company Expects to Receive a Large Payment in Three