Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest rates?

Question

Quizplus · Accepted Answer

By selling interest rate futures, the portfolio manager can lock in a price for the Treasury bonds in the future, which would offset any losses caused by rising interest rates. With a short position in interest rate futures, the portfolio manager would profit if interest rates go up, helping to offset any losses on the Treasury bonds. Therefore, D is the best choice. A, B, C, and E are not relevant to protect against the risk exposure of rising interest rates.

Conyers Bank Holds Treasury Bonds with a Book Value of $30