Reading 29 - Q3 - Fixed Income hedging strategies?

Hi all, I’m confused about the CFA answer to Reading 29, Q3. The answers states that if an analyst has no clear opinion about the int rate outlook but wants to avoid risk, they would sell int rate futures. However, if they believe rates will risk they would purchase puts. Wouldn’t it be the other way around? I would think if you expect rates to rise, you’d want to lower duration by selling futures. If you had no clear opinion and wanted to avoid risk, you could purchase a put to establish a floor while still participating in upside if rates drop. Can anyone clarify? Darryl

you need to read the first part of the question: to preserve the value of the pension (i think you are thinking of income/return only) and not at TOTAL return. if interest rates are going up => yield is up but value goes down. to preserve value you sell futures

I’m not sure I understand your answer. I suggested that selling futures was appropriate if you believe rates are going to rise…which I think you’ve just confirmed. However, the text suggests that it would be more appropriate to purchase puts, doesn’t it?

the question ask you to determine if the ‘consultants’ are expecting increase/decrease/no move in interest rates based on their respective decisions. I think you may be rushing your reading of the question, perhaps? there are multiple parts to this question.

In the question, they describe 4 strategies and 4 analyst outlooks and ask you to figure out which analyst would have most likely proposed each strategy. I don’t have a problem with the answer w.r.t. the strategy of “do nothing”(expect rates to fall) and “covered calls”(expect rates to remain stable). I’m only confused about the justification given for the remaining two match-ups.

look at the payoff = max[0. X-S] and will exercise the put