A Dutch institutional investor has decided to bet on a drop in U.S. dollar bond yields. It engages in a leveraged strategy, borrowing $100 million at LIBOR plus 0.25% and investing the proceeds in attractive, newly issued, long-term dollar international bonds. Suddenly, the investor becomes worried that bond yields have hit bottom and will rise because of inflationary pressures. The investor wishes to keep the specific international bonds that have been selected, partly because of their attractiveness and partly because of their lack of market liquidity. What kind of swap could be arranged to hedge this U.S. dollar bond yield risk?

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The Answer of A Dutch institutional investor has decided to bet on a drop in U.S. dollar bond yields. It engages in a leveraged strategy, borrowing $100 million at LIBOR plus 0.25% and investing the proceeds in attractive, newly issued, long-term dollar international bonds. Suddenly, the investor becomes worried that bond yields have hit bottom and will rise because of inflationary pressures. The investor wishes to keep the specific international bonds that have been selected, partly because of their attractiveness and partly because of their lack of market liquidity. What kind of swap could be arranged to hedge this U.S. dollar bond yield risk?

A Dutch Institutional Investor Has Decided to Bet on a Drop