Clark Dale is one of the investment portfolio managers at ACG in charge of managing a $15 million Treasury bond portfolio account for a trust fund. He is considering the use of Treasury bond futures in an attempt to hedge the account portfolio. He consults with you with regard to the best plan of action for investment and portfolio management of this account. How would you counsel Clark?
- Is a hedging strategy the best plan of action?
- Explain why you think Clark is considering this strategy.
- What is the relationship between bond prices and interest rate fluctuations?
- Should he consider a long or short hedge strategy?
- Explain your reasoning behind your suggestion. What will the return be?