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Arnold Wu owns a floating rate bond. He is concerned that the rates may fall in the future decreasing his payment amount. Which of the following instruments should he buy to hedge against the fall in interest rates?
Correct Answer: D
Arnold Wu owns a floating rate bond and is concerned about the potential decrease in interest rates, which would reduce his interest payments. To hedge against this risk, he should enter into an interest rate swap where he receives floating and pays fixed. This means he would continue to receive floating rate payments (which would decrease if interest rates fall) while making fixed payments. This swap effectively locks in his interest income, providing protection against falling interest rates.