Question

Which of the following strategies can be implemented in falling interest rate environment to hedge the interest rate risk (select as many as applicable)? Please explain your logic in a concise way.
1. Buy short-term and long-term bonds
2. Sell long term bonds and buy short term
3. Buy long term bonds and sell short term
4. Sell a fixed coupon bond and enter a swap receiver position
5. Buy a fixed coupon bond and enter a swap payer position
6. Buy the corporate bond and sell the matching maturity government bond
7. Buy a CDS
8. Sell a CDS
9. Receive a total return swap
10. Pay a total return swap

Answer 1

I will be using below strategies to hedge against interest rate fall :

There is always a inverse relation between Bond market and interest rates. As the interest rate rise the price of the bond goes down and vice versa. As the investors goes for buying of bonds which pays more interest/Coupon than the interest rates. Hence If need to to hedge the interest rate risk and I am assuming that the interest rates will go down than I will always go for buying of Bonds.

Now coming to the above strategies I can buy short term as well long terms as fall in interest rate will help the bond prices to rise and will simultaneously help me gain through the coupons. However for short terms the interest rate would be lower that I will get on the long terms bonds.

Another strategy which can be used to hedge interest rate risk is Sell a fixed coupon bond and enter a swap receiver position in this strategy the SWAP receiver receive fixed rate of interest which can help if the the interest rates falls. Usually a SWAP receiver receives fix interest rate pay a floating rate which depends on LIBOR.

One more strategy I would use here would be Pay total return SWAP as in this I can receive a a fixed interest rate and on the other hand the party would make payment based on the underlying assets.

Note - Please provide me with you're valuable feedback if you are satisfied with my answers. Thank you in advance :)