INTEGRATIVE PROBLEM: Assume that the U.S. has just experienced a mild recession. As a result, interest rates have declined to their lowest levels in a decade. The U.S. interest rates appear to be influenced more by changes in the demand for funds than by changes in the supply of U.S. savings, because the savings rate does not change much regardless of economic conditions. The yield curve is currently flat. The federal budget deficit has been reduced lately and is not expected to rise substantially. Recently, the federal government decided to reduce personal and corporate tax rates significantly for all tax brackets. The U.S. dollar has just recently weakened. Economies of other countries were somewhat stagnant, but have improved in the past quarter.

Read the integrative problem above and respond to the following: Please include an Introduction, conclusion and references:

• 1) Assume that you run a hedge fund. You expect that the recession will continue for awhile and that both short-term and long-term interest rates are likely to ) decline. What derivative securities do you recommend the hedge fund purchase? Justify your selections?
• 2) How can an insurance company, that has the majority of its assets in U.S. stocks, hedge its portfolio during this recession? Use examples to support your recommendation(s)?

Answer rating: 100% (QA)

Introduction In the given scenario the US has undergone a mild recession resulting in a decrease in interest rates to the lowest in a decade The yield curve is currently flat and the federal budget de... View the full answer