You have entered into a swap where you receive the fixed rate and pay the floating rate.What is the best way to hedge interest-rate risk in this swap from among the following choices?
A)Add a long position in fixed rate bonds.
B)Add a short position in interest-rate futures.
C)Add a basis (i.e. ,floating-floating)swap.
D)Add a short position in FRAs.

Question

Quizplus · Accepted Answer

The risk in the swap is that the interest rate rises and the swap loses money for you.Adding a long position in fixed-rate bonds makes the position worse.As rates rise,interest-rate futures fall in price,so a short position in these futures is a good hedge.A basis swap just replaces one floating rate with another,and does not extinguish the risk of rising interest rates.A short position in FRAs loses money when rates rise and makes the swap position worse.Interest-rate futures depreciate when rates rise,so shorting them provides a hedge.

You Have Entered into a Swap Where You Receive the Fixed