Hedging Strategy Essay Example | Topics and Well Written Essays - 500 words

Hedging Strategy - Essay Example By considering the Treasury bond futures hedging strategy, he can minimise his risk as it is an effective instrument of risk control and can also enhance his returns. As Treasury bond futures cover up a broad range of maturities from the bonds of long term to short term notes, so it will help Clark to construct trades depending on the disparities in the movements of interest rates alongside the yield curve. There is negative connection between the fluctuations in interest rates and the bond prices. The increase in the interest rates is bad for bonds because when the rate of interest rises, the shareholders or investors in the bond fund prefer to liquidate or settle their shares. Due to this, the finance manager might be compelled to sell its bonds prematurely to raise sufficient cash in order to meet its requests of redemption. This could have a pessimistic effect on the regular price of bond fund (Forbes, 2013). Conversely, a fall in the interest rates results in the increase in the bond prices. This happens because, if rates of interest fall after the purchase of bond, the worth of bond will rise as investors will not be able to purchase a new bond with a high coupon rate. In this situation, the value of bond will be more than the actual value. Consequently, it will be traded at a premium (Bodie et al, 2009). Clark should consider the short term hedging strategy. Investment in the short term bonds is recommended because long term maturities bond would be hit tremendously when there is an increase in the rates of interest. Along with this, he should consider the individual bonds but require being cautious with the issuer’s credit quality. Clark also needs to be sure that the company is monetarily strong and proficient to repay his principle on the maturity of bond. A short term bond is suggested because this will facilitate Clark not to become locked in a low interest rate for an extended period (Forbes, 2013). The reason behind suggesting the