So I run into a few questions that talk about an expected short-term/temporary trend and what strategies to use… And in those questions, the answer was do nothing because it is only short term and the goal is long term based, so the asset wont be impacted.
Then I run into other similarly worded questions and the answer is to use the futures and yield curve strategies because they are great for short term & temporarily changes, and specifically you should use the derivatives and instruments to profit.
Schweser qbank… Here’s one example where they say take no action…
Q: Frank Meinrod is in charge of the risk management committee for Alpha Portfolio Managers. Recently, the value of one of the company’s bond positions has decreased due to a potential steep rate hike by the Federal Reserve. Meinrod believes that the rate hike will be moderate and that the decline in the bond portfolio value is temporary. Which of the following is the best action for Meinrod to take? Meinrod should advise the risk management committee that they should:
A(s):
A- hedge the position by selling interest rate futures.
B- hedge the position by buying interest rate futures.
C- take no action at all.
Meinrod should advise the risk management committee that they should take no action at all. In most cases, when there is a risk management problem that is viewed as temporary, the best course of action is often to take no action at all.
So in this example, is it because we’re doing risk management and no need to hedge a short term risk since the loss is unrealized, and If we were looking to generate profits, we would take a position not to hedge but to earn profit?
I think that the key here is that the decline will be temporary, not that it’s short-term. There’s no need to hedge something that’s going to correct itself during your expected holding period.