A pension fund holds $10 million in Treasury bonds. In order to protect against a rise in interest rates, the pension fund should use a long hedge in T-bond futures.

Question

Quizplus · Accepted Answer

To protect against a rise in interest rates, the pension fund should use a short hedge in T-bond futures, as this would allow them to sell futures contracts now and buy them back at a lower price in the future if interest rates rise (since bond prices and interest rates move inversely).

A Pension Fund Holds $10 Million in Treasury Bonds