Hi there - I was wondering if anyone tried out this question regarding which derivative overlay is better to hedge Pensions Liabilities? I was a bit stuck on the concept of how interest rate call options are better designed to hedge against short-term interest rates and the short end of the yield curve, wheres as options of the prices of futures contracts are better to hedge against longer end of the yield curve. I was having trouble finding anywhere this idea is referenced in Schweser of CFA materials. If the options contract expires roughly within the same period (ie 180 days max) why would it matter which one you would use? Am i missing something here? Thanks PS (I just found this website last week- cant believe it took me this long - some great posts in here)
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IR call options are based on LIBOR, which is generally a shorter term interest rate. Option the bond are based on 30 US treasury (although CTD may be different). The duration of the underlying on the bond future better matches the liability here.
thanks - i get it - would have missed that if asked on the exam tho. is it explained anywhere in our study info or is that something we would be expected to piece together?