medium · CFA Level I Fixed Income
Helion Rail's treasury department is using effective duration to hedge a liability.
If the hedge is based on modified duration instead of effective duration for a callable bond, the hedge will most likely be:
- Too small (under-hedged) because modified duration ignores the potential for rates to fall.
- Perfectly matched, as both are valid duration measures.
- Too large (over-hedged) because modified duration overstates the bond's actual sensitivity.
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More CFA Level I Fixed Income practice
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