Bond futures during decreasing Interest Rates

[johntavv]

Reading 23 CFAI practice problem 3 says:
“You would like to protect the bonds in a fund’s portfolio using options and futures”.
Consultant B thinks interest rates are going to decrease, so as a bond holder, he suggests not buying options/futures and simply gaining from the increasing bond prices.
However, if Consultant B thinks interest rates are going to decrease, why wouldn’t he buy a bond future, so that he can also gain on the contract itself?

 

[Would You Look]

I read the chapter quite some time ago, but if i recall correctly, it’s a matter of needing to hedge the bond portfolio or not, rather than trying to capitalize on your market outlooks. If you think that rates will decline and prices will rise, you don’t need to buy protection. Like I said, that’s just what I recall from reading it some time ago. Certainly others will chime in with better answers.

 

[pollfre]

The derivative is used here as a hedging instrument and not for trading. Therefore “doubling” the position is not a possible answer I guess…

 

[johntavv]

Oh okay, so if you just want to protect the portfolio, you would do nothing, so as interest rates decrease, value increases.
But if you wanted to make profit from trading, then you would buy the bond future.
Thanks

 

[FrankCFA]

The question asks the issue of “protecting” the bonds. Build up additional position to take the view is not discussed here.

 

[Galli]

By taking a speculative long position in bond futures you’re increasing the risk profile of your portfolio which wouldn’t ‘protect’ your position