A hedge with a futures contract reduces volatility in payoff gains on both the upside and downside of interest rate movements.

Question

Quizplus · Accepted Answer

A hedge with a futures contract means taking an offsetting position in a futures contract that moves in the opposite direction of the hedged asset. This reduces the risk of price fluctuations in the underlying asset, resulting in reduced volatility in the payoff gains on both the upside and downside of interest rate movements.

A Hedge with a Futures Contract Reduces Volatility in Payoff