You have entered into a swap where you receive the fixed rate and pay the floating rate. What is the best way to hedge interest-rate risk in this swap from among the following choices?
A) Add a long position in fixed rate bonds.
B) Add a short position in interest-rate futures.
C) Add a basis (i.e., floating-floating) swap.
D) Add a short position in FRAs.

Question

Quizplus · Accepted Answer

Adding a short position in interest-rate futures would hedge the interest-rate risk in the swap as it would provide a fixed rate that would move inversely to the floating rate paid in the original swap. This would help offset any gains or losses from the original swap due to changes in interest rates. Adding a long position in fixed rate bonds, a basis swap, or a short position in FRAs would also be options for hedging interest rate risk, but adding a short position in interest-rate futures is likely the most efficient and effective way to do so.

You Have Entered into a Swap Where You Receive the Fixed