YEAR GERMAN GOVERNMENT BONDS. WHICH POSITION IN THE FUTURES SHOULD...

10-year German government bonds. Which position in the futures should the corporation take, and why?

a.

Take a long position in the futures because rising interest rates lead to rising futures prices.

b.

Take a short position in the futures because rising interest rates lead to rising futures prices.

c.

Take a short position in the futures because rising interest rates lead to declining futures prices.

d.

Take a long position in the futures because rising interest rates lead to declining futures prices.

Correct Answer: c

Rationale:

Government bond futures decline in value when interest rates rise, so the housing corporation should

short futures to hedge against rising interest rates.

Section:

Financial Markets and Products

Reference:

John Hull, Options, Futures, and Other Derivatives, 9th Edition, Chapter 3, “Hedging Strategies Using

Futures.”

Learning Objective:

Define and differentiate between short and long hedges and identify their appropriate uses.

42

© 2015 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material

in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.

2015 Financial Risk Manager (FRM®) Practice Exam