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Suppose that you have been observing libor rates and that you believe a collection of large banks are conspiring to artificially increase the libor rate.
Suppose that you have been observing libor rates and that you believe a collection of large banks are conspiring to artificially increase the libor rate. This has never happened before.
You have hedged a short position in a interest rate cap using an HJM hedge ratio. In the past, this HJM hedge ratio removed all of the interest rate risk. It worked well.
Given your belief about the libor rate manipulation, is your hedge riskless now? Why or why not? Explain.
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