Question
3. Interest Rate Risk is the risk associated with changes in interest rates and is comprised of the risk relating to changes in the outright
3. Interest Rate Risk is the risk associated with changes in interest rates and is comprised of
the risk relating to changes in the outright level of interest rates and changes in the level of
interest rates across the yield curve. Select the most accurate statement below:
A. An outright Duration Neutral portfolio comprised of a long position in a number of
fixed income securities of varying terms to maturity and short positions in bond
futures contracts will never be exposed to interest rate risk.
B. The relationship between changes in interest rates and changes in the price of a
fixed income security is linear and positive
C. An outright Duration Neutral portfolio comprised of a long position in a number of
fixed income securities of varying terms to maturity and short positions in bond
futures contracts will be exposed to interest rate risk to the extent that the changes
in the level and shape of the yield curve contradict the assumptions implicit in a
methodology chosen to set the duration hedge.
D. An outright Duration Neutral portfolio comprised of a long position in a number of
fixed income securities of varying terms to maturity and short positions in bond
futures contracts will always be exposed to interest rate risk.
E. None of the above
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