23-21 A hedge with a futures contract reduces volatility in payoff gains on both the upside and downside of interest rate movements.

Question

Quizplus · Accepted Answer

Hedging with a futures contract involves taking positions in the futures market that are opposite to an underlying asset or liability position. This strategy can reduce volatility in payoff gains on both the upside and downside of interest rate movements. Essentially, the futures contract serves as a form of insurance against adverse price movements, so that gains from the futures contract can offset any losses from the underlying asset or liability position.

23-21 a Hedge with a Futures Contract Reduces Volatility in Payoff