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What is meant by hedging in the financial futures market to offset interest rate risks?

Short Answer

Expert verified

The hedging in futures markets means that if the interest goes up in the future, then the investor will be able to buy the contract at a profit and reduce its interest rate risk.

Step by step solution

01

Meaning of interest rate risk

The interest rate risk is the risk that the investor will incur a loss when the interest rate will move high as it will reduce the face value of the investment.

02

The hedging in futures market to reduce interest rate risk

The investor sells the futures contract so that when the interest of the contract will move up in future, it will allow the investor to buy the contract at a profit, and offset the interest charges.

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