Which of the following would be least likely to provide an effective hedge for an investor with a portfolio primarily in fixed coupon bonds? a sell bond futures b buy commodity linked equities c buy commodity options d buy interest rate puts i have no idea how to go about solving this…
guess --> sell bond futures? My reasoning: When interest rates go up and down – is when your fixed income portfolio would be hurt. If you bought Commodity linked equities and commodity options - since these are commodities ***as the underlying somewhere *** they would not be hurtful. Buying an interest rate put – gives u protection when rates go up… because then you can PUT it back – and when rates fall, you would not have to do anything. CP
answer was D. SS Q 120, exam 2 afternoon.
Bcos: Long Commodities positions tend to hedge the risk that bonds would decline in value because of increases in inflation or because of higher interest rates due to an increase in the overall level of economic activity. Selling Bond Futures would hedge against the rising rates. Interest rate puts INCREASE in value as Rates FALL --> and would not provide a hedge.
D makes sense if you were short the market in your portfolio. You would want to be protected from a rally (or drop in rates, which is where the put comes in). However, if you are long the market this would just not hedge anything
you need something to hedge against when interest rates rise. a) great hedge b)+c) commodities rise when inflation rises. d) you are long put - if you have a look at a diagram, you will basically see that you make money off a put when interest rates fall. Not really a good investment to hedge. answer d.
I just reread the question and I see that it says LEAST likely. The answer then is most definitely D. This question however that your fixed income portfolio is long the treasury market
This is an odd question because if someone tells me to go buy interest rate puts, I buy Eurodollar futures puts which are an excellent bond hedge.