bingbingliang

jgradits,

I think this qn is more about interest rate risk than price risk.

I understand to the point that when portfolio intrest falls, the long future is going to help as we have purchased the option.

However, this moght not be a perfect hedge. As the portfolio bond is an add-on instrument vs the eurodollar futures contract -- a discount instrument.

Also note that the qn conpares between the T-bill and Euro dollar. In this case, Euro is preferred as it is attached to LIBOR the same reference as in the case of the portfolio.

I guess the among the choices, as taking a short position does not help at all to hedge the declining rates, the only choice remains 2). However is not a perfect hedge.

Am I missing something?