An FI Portfolio Manager Holds 10-Year $1 Million Face Value

question 72

Multiple Choice

An FI portfolio manager holds 10-year $1 million face value bonds.At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months.What should the manager do?

• A)The FI portfolio manager should leave the position untouched as changes in the interest rate have no impact on bond prices.
• B)The FI portfolio manager should leave the position untouched as an increase in interest rates will lead to higher bond prices.
• C)The FI portfolio manager should hedge the position by selling a three months forward contract with a face value of $1 million.
• D)The FI portfolio manager should hedge the position by buying a three months forward contract with a face value of $1 million.

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Definitions:

Blocks Receptors

Refers to substances or mechanisms that inhibit the action of neurotransmitters by occupying their receptor sites and preventing activation.

Agonist

A chemical or drug that binds to receptors in the brain and causes a reaction or response similar to a naturally occurring substance.

Antagonist

A molecule that binds to a receptor but does not activate it, thereby blocking action of agonist molecules or inhibiting the function of an enzyme.

Curare

A plant extract used by South American indigenous peoples on arrows and darts for hunting, which acts as a muscle relaxant by blocking neurotransmission.