Asked by Lily Nyarko on Jun 07, 2024
Verified
An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have ________.
A) an arbitrage
B) a cross-hedge
C) an over hedge
D) a spread hedge
Corporate Bond Portfolio
A collection of corporate bonds held by an investor or managed by a financial institution.
T-bond Futures
Financial contracts obligating the buyer to purchase U.S. Treasury bonds at a specified price at a future date, used for hedging and investment purposes.
Cross-hedge
A hedging strategy using a contract that has price movements correlated with, but not identical to, the asset being hedged.
- Describe cross-hedging and its application in managing risks associated with interest rates and bond portfolios.
Verified Answer
SS
Sadaf SediqiJun 13, 2024
Final Answer :
B
Explanation :
Hedging a corporate bond portfolio using a T-bond futures contract is an example of cross-hedging. Cross-hedging involves using a financial instrument to hedge against risks in a different but related financial instrument. In this case, the T-bond futures contract is used to hedge against the risk of changes in interest rates affecting the value of the corporate bond portfolio. An arbitrage involves taking advantage of price discrepancies in different markets to make a profit, an over-hedge involves hedging more than is necessary, and a spread hedge involves taking offsetting positions in two related securities to reduce risk.
Learning Objectives
- Describe cross-hedging and its application in managing risks associated with interest rates and bond portfolios.