medium · FRM Part 1 Financial Markets and Products
A Treasury bond portfolio is hedged against a parallel shift in interest rates using bond futures. However, the yield curve undergoes a 'twist' where short-term rates fall and long-term rates rise.
What is the most likely outcome?
- The hedge stays fully effective since duration captures all yield curve movements, parallel or not.
- The hedge will fail to perfectly protect the portfolio because it only accounted for a single, parallel shift in yields.
- The basis converges to zero at once, wiping out any chance of a hedging loss on the position.
- The portfolio gains overall, since falling short rates lift the value of every bond in the book regardless of maturity.
Sign up free to see the explanation and track your rank →
More FRM Part 1 Financial Markets and Products practice
- If the oil market shifts from backwardation to a persistent contango, which of the followi
- If at the time of delivery S_1 = $72 and F_1 = $74, while the hedge was entered at F_0 =
- According to the standard 'Default Waterfall' of a Central Counterparty (CCP), which layer
- A 'Fallen Angel' is a term used in the bond market to describe:
- A 'long' position in which of the following provides insurance against a rise in prices?
- An American put option is deep in the money. Why might it be optimal to exercise this opti
- If at maturity the futures price were significantly higher than the spot price, what would
- How is the 'swap rate' typically determined at the inception of an interest-rate swap?