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The Handbook of Fixed Income Securities, Eighth Edition, 8th Edition by Steven V. Mann, Frank J. Fabozzi

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CHAPTERSIXTY-ONECONTROLLING INTEREST-RATE RISK WITH FUTURES AND OPTIONS

FRANK J. FABOZZI, PH.D., CFA

Professor of FinanceEDHEC Business School

SHRIKANT RAMAMURTHY

Consultant

MARK PITTS, PH.D.

In Chapter 59 the features and characteristics of interest-rate futures and options were explained. In this chapter, our focus is on how these derivative instruments can be used to control the interest-rate risk of a portfolio.

CONTROLLING INTEREST-RATE RISK WITH FUTURES

The price of an interest-rate futures contract moves in the opposite direction from the change in interest rates: when rates rise, the futures price will fall; when rates fall, the futures price will rise. By buying a futures contract, a portfolio’s exposure to a rate increase is increased. ...

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