The number of futures contracts that an FI should buy or sell in a macrohedge depends on the
A)size of its interest rate risk exposure.
B)direction of its interest rate risk exposure.
C)return risk trade-off from fully hedging that risk.
D)return risk trade-off from selectively hedging that risk.
E)All of the above.

Question

Quizplus · Accepted Answer

The number of futures contracts that an FI should buy or sell in a macrohedge depends on all of the factors mentioned in the options. The size of the interest rate risk exposure determines the quantity of contracts needed, the direction of the exposure will determine whether the FI should buy or sell contracts, and the return risk trade-off will help the FI decide whether to fully hedge or selectively hedge its risk. Therefore, all options are important in determining the appropriate number of futures contracts.

The Number of Futures Contracts That an FI Should Buy