It gives you four consultant’s opinion and then 4 actions and asks you to match action with opinion. In the answers, it said if one has no opinion on interest rate outlook but would like to avoid risk, selling IR futures would be a good strategy because if IR were to decline, the loss in value of bonds would be offset by gains from future. I’m a little lost here. If IR decline, the bonds would gain in value. Being long a fixed rate bond is essentially being short in IR, so not sure how selling IR futures would be a risk avoiding strategy. I don’t see an errata on this either.
When IR decrease, IR futures increase. They are priced like 100(1-r).
good point that does not make sense …
Think of IR Future as Bond Futures, when IR Increase they both Decrease and when IR Decrease the both Increse.
but IR calls increase when IR increase. Go figure :-/
Oh and if your above statemetn is true, then I would guess that there should be an Errata b/c if IR’s decrease Bond Prices will Increase and if you are Short an IR Futures then that will decrease offsettign the gain in bonds.
this was discussed to death about a month ago.