Futures buy/sell and hedging portion

CFA Level III
#1

Hi all, I have been reviewing CFAI practice exam and a bit stuck on a concept.

Let’s say we are buying futures when and selling futures in the below situation.

(1) buying futures

  • int rate rise : price declines so we need to over-hedge to get protection

  • int rate fall : price increases so we need to under-hedge to gain exposure of falling int rate

(2) selling futures

  • int rate rise : price declines so we under-hedge to gain exposure

  • int rate fall : price increases so we need to over-hedge to get protection

Is my understanding correct?

#2

The direction of your trade (buy or sell) depend on your current portfolio and market view. if you are long duration and believe interest rates will rise, you should sell futures contracts of treasury bonds up to the amount that will leave you with the desired reduced duration (and vice versa). Over-under hedging will depend on how much market exposure you want to have. I think this is a better way to view hedging with futures.