Interest Rate Futures as a Hedging Tool in Bond Management

Hard Risk Management Derivatives In Risk Management

Jessica is a senior portfolio manager at a large investment firm. Her client has expressed concerns about the impact of rising interest rates on their bond portfolio, which constitutes a significant portion of their investments. To mitigate this risk, Jessica is considering various derivative strategies. One option she is evaluating involves using interest rate futures to hedge against potential losses in the bond market.

Jessica's bond portfolio primarily consists of long-term fixed-income securities, and she believes that a suitable hedge can help preserve the portfolio's value against interest rate fluctuations. However, she also recognizes the complexities involved in implementing such derivatives and the potential impact on the overall risk profile of the portfolio.

Which of the following statements best describes the risk management approach Jessica should consider when using derivatives for hedging interest rate risk?

Jessica should ensure that the notional amount of interest rate futures matches the market value of the bonds being hedged to effectively manage basis risk.

Jessica should use interest rate futures only for short-term hedging, as they are less effective for long-term interest rate risk management.

Jessica should consider the duration of both the interest rate futures and the bond portfolio to ensure a proper alignment of interest rate risk exposure.

Hint

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