Question

Assume today is 4 May 2017 and you intend to invest in 90-day Bank Accepted Bills (BAB) on 11 June 2017. You decide to take a position in the BAB futures contract to hedge the interest rate risk that you are likely to face between now and 11 June 2017. What is the nature of the interest rate risk you are likely to face, and how will you use the BAB futures contract to hedge that risk?

	A.	A fall in short-term interest rates, hence hedge by buying the BAB futures contract.
	B.	A fall in short-term interest rates, hence hedge by selling the BAB futures contract.
	C.	Short-term interest rates do not change, hence there is no need to hedge.
	D.	A rise in short-term interest rates, hence hedge by buying the BAB futures contract.
	E.	A rise in short-term interest rates, hence hedge by selling the BAB futures contract.

Answer 1