Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the default risk. A short position in Treasury bill futures ____ an effective hedge against the default risk.

Question

Quizplus · Accepted Answer

A short position in either Treasury bond futures or Treasury bill futures would not be an effective hedge against default risk because these positions primarily hedge against interest rate risk, not credit or default risk.

Assume That Corporate Bond Portfolio Managers Are Concerned About the Possibility