Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

CFA Events Calendar

View full calendar

CFA Events Calendar

View full calendar

Recommended Discussions

See how our partners can help you ace your CFA exams.

Question of the Week: Level 3 - Fixed Income

Which option below to hedge pension liabilities has the least amount of spread risk?

Question of the Week: Level 3 - Fixed Income 8 votes

A. Received-fixed swaps.
62% 5 votes
B. Assets of higher quality than the liabilities.
12% 1 vote
C. Futures contracts on the 10-yr US Treasury notes.
25% 2 votes


  • MarkMeldrumMarkMeldrum OntarioPosts: 73 Associate
    The correct answer is Option A. 

    Both Option B and Option C result in Asset BPV derived from government bonds.  Movements in the corporate – Treasury yield spread introduce risk to the hedging strategy. Usually, yields on high-quality corporate bonds are less volatile than on more-liquid Treasuries.

    For Option A, the spread risk is between high-quality corporate bond yields (the pension liabilities) and swap rates. Typically, there is less volatility in the corporate/swap spread than in the corporate/Treasury spread because both Libor and corporate bond yields contain credit risk vis-à-vis Treasuries.

Sign In or Register to comment.