Bond Question

In the CFAI material I found the following statement: " If one has no clear opinion about the int. rate outlook but would like to avoid risk, selling int. rate futures would be a good strategy. If int. rates were to decline, the loss in value of bonds would be offset by the gains from futures." Doesn’t sound right to me. You would profit from both sides in this case as bond prices will actually go up.

i’m with you. which page was that?

Volume 4, solution to question 3 on Reading 29 (Page A-3)

But didn’t you sell the Interest rate future. So you would have to pay. So because the Price of the bond rose, you would have to pay. CP

The word that is the mistake here is “decline” which should be increase. Interest rate futures are designed to look like bond futures. Thus a ED future is some number like 95 and if interest rates increase, a short position in a ED contract makes money. Hence, long a bond, short an interest rate future is a hedged position.

Joey I remember from Level 2 that “Int. rates futures” are the exact opposite to “Bond futures.” Similar to “options on Bonds” and " Interest rate options". In this problem it would be hedged if this was a Bond future (short would profit if int. rates increase). or if he was long the interest rates future. I’ll have to go over the reading one more time to see if this was mentioned anywhere.

Nope - Interest rate futures are similar to bond futures (interest rate options are the opposite of bond options however). For example, the eurodollar future is quoted as 100(1 - r) where r is the annualized Eurodollar rate. All interest rate contracts that I can think of (which is quite a few) are quoted similarly. Long ED contract is the same kind of bet as long bond contract.