What risks are associated with hedging?
Answer to relevant QuestionsHow could a portfolio manager use a Treasury bond futures contract to hedge against increased interest rates over the next quarter? One of the problems in liability-driven investing when using cash market Treasuries for hedging interest-rate risk is that the duration will producea dollar duration that does not match that of the iability dollar duration. ...For a Treasury futures contract, how do you think the cost of carry will affect the decision of the short as to when in the delivery month the short will elect to deliver? Explain why the writer of an option would prefer an option with a high theta (all other factors equal). What arguments would be given by those who feel that the Black-Scholes model does not apply in pricing interest-rate options?
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