If a futures contract is used to hedge a debt sale, and interest rates go down causing debt security prices to rise, the potential benefit of being able to issue debt at that lower interest rate (higher price) will be offset by a loss on the futures position.

Question

Quizplus · Accepted Answer

When a futures contract is used to hedge a debt sale, any gain on the debt sale due to lower interest rates will be offset by a loss on the futures position. Thus, the potential benefit of being able to issue debt at a lower interest rate (higher price) will be cancelled out by the loss on the futures position. Therefore, the statement is true.

If a Futures Contract Is Used to Hedge a Debt