Topic 16, Exercise 2 Hedging Interest Rate Exposure The futures market can be used to hedge interest rate exposure. The market allows you to protect against a rise in rates or a fall in rates. In other words, you can protect both investing rates and borrowing rates. These contracts allow you to protect against a single or a series of events. The futures exchanges offer a wealth of information on contracts and trading strategies. CME (Chicago Mercantile Exchange) provides an information resource, “Interest Rate Futures: The Basics,” which describes some basic hedging strategies. After reviewing these materials, answer the following questions on hedging using interest rate futures: 1. Explain the concept that futures protect against losses associated with unfavorable movements in rates but also limit gains attributed to favorable movements in rates. When futures are used to hedge, the net effect is to lock in the forward rate or futures rate specified in the contract. If rates moved in your favor—lower rates if you were
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