Question content area

Part $1$

An article on bloomberg.com in early $2020$ discussed a fund manager who believed that interest$$ rates, which had been$$ falling, would soon begin increasing.$$ Therefore, his fund was$$ "buying derivatives that will pay off if rates go back$$ up$."$

Which derivatives would his fund likely be$$ buying? How might these derivatives pay off if interest rates$$ rose?

Part $2$

This fund would likely use

futures contracts

$.$

For$$ example, the firm could

go long in the futures market by buying

Treasury note futures contracts. If interest rates do end up rising they can then

sell futures contracts at a higher price

than they initially paid to offset their initial position in Treasury notes.

Part $3$

What would happen to the prices of these derivatives if interest rates$$ fell?

Part $4$

If interest rates end up falling the value of the derivatives that they purchased to hedge risk would

fall

$.$

Part $5$

If this fund manager was correct and interest rates$$ rose, would that have been good news or bad news for investors who owned$$ bonds?

Part $6$

A$.$

This would be bad news for those that already owned bonds since they will need to make larger payments to the firms that issued the bonds.

B$.$

This would be good news for those that already owned bonds since it signals the issuing firm is now more profitable which increases the dividend payments from the bond.

C$.$

This would be good news for those that already owned bonds since the higher interest rates means they will be receiving higher payments on the bonds they own.

D$.$

This would be bad news for those that already owned$$ bonds, the value of their bonds would decrease since they are set at a lower rate.