An investor wishes to hedge a bond portfolio with a duration of 8 for the next 6 months. Treasury interest rate contracts is most appropriate to be used as a hedging instrument? a. A 6-month Treasury bill contract. b. A 3-month Treasury bond contract. c. A 6-month Treasury bond contract. d. A 3-month Eurodollar contract.
A. A 6-month Treasury bill contract Treasury bonds only come in 20 and 30-years, and you need a 6-month contract to hedge for the next 6 months.
Treasury bonds come in everything from 0 to 30, though it’s a little lumpy (whaddya think happens to a 30 yr bond 11 yrs after it’s issued?). T-bills and Eurodollars have much shorter duration than 8 so a 6-month T-bond contract would work much better. A 6-month T-note contract would work even better.
i’d choose C, only cos: its 6 month there are two “bond” answers, so my guess would be that
i’d go with C coz bond pays coupon, not bill. and to hedge the risk, you want something with coupon interest payment.
i choose A cause there is an A in all of the choices…
i choose A cause there is an ‘contract’ word in all of the choices…
very funny =) but sometimes you can get away with the correct answers (or at least narrow down your choices) just by asking yourself ‘how are they trying to trick you’… for example, with the variance/st dev questions… they always put both answers there, to catch out the people who forget to take the square root… just the little things like taht you can use to your advantage i think… but yeh, imma dork
soooooooo… how is bluey going to trick me? he’ll pick C so i get it wrong… but then i choose A!