A manager wants to hedge the risk of a liability due as a single payment in ten years with a duration of 10. What should he/she do?

Interview Question: A manager wants to hedge the risk of a liability due as a single payment in ten years with a duration of 10. What should he/she do?

Answer: He can do one of the following:

1) Invest the present value of the liability now to accumulate enough to pay off the liability in ten years.

2) Invest in a bond with the same duration of the liability.

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