Volume 2 Schweser exam 2 Question 37

I am little confused,can somebody explain here what is the risk for weaver here?

can you summarize the question and answer? not everyone has Schweser material

So the question isn’t asking about the risk FOR Weaver. They are asking about an appropriate hedge for holding a $2 million note with a duration of 4.0 which Anderson accepted as payment from Weaver Tools. The question is essentially asking how Anderson could hedge the exposure of this Weaver Tools note, which pays a fixed interest payment to Anderson.

Edwards’ suggestion: Sell series of interest rate calls. Palmer’s suggestion: Enter an interest rate swap as the fixed-rate payer.

The question asks which is correct/incorrect. Edwards is incorrect. Anderson is holding the 4.0 duration Weaver Tools note. If interest rates rise, the market value of that note goes down. If interest rates rise and they had sold interest rate calls, Anderson would also lose on that trade. Palmer is correct.

Thank you for the explanation…Initial risk recognization itself was not clear to me…Hence could not understand what was supposed to be hedged?