A Canadian pension fund administrator is concerned about interest rate risk on their portfolio of fixed income securities and wants to protect against a rise in interest rates. Which derivative strategy would best mitigate this risk?

Question: A Canadian pension fund administrator is concerned about interest rate risk on their portfolio of fixed income securities and wants to protect against a rise in interest rates. Which derivative strategy would best mitigate this risk?

Answer options: ✅ Selling bond futures contracts.

• Buying bond futures contracts.
• Selling interest rate call options.
• Buying interest rate floor contracts.

Correct answer: Selling bond futures contracts.

Explanation: A rise in interest rates causes bond prices to fall. To hedge against falling bond prices, the pension fund should sell bond futures contracts. If interest rates rise and bond prices fall, the short futures position will generate a profit that offsets the loss on their fixed income portfolio.