If a trader is creating a fixed income hedge, which hedging methodology would be least effective if the trader is concerned about the dispersion of the change in the nominal yield for a particular change in the real yield?
A) One-variable regression hedge.》》2021年新版FRM一二级内部资料免费领取！【精华版】
B) DV01 hedge
C) Two-variable regression hedge.
D) Principal components hedge.
解析：The DV01 hedge assumes that the yield on the bond and the assumed hedging instruments rises and falls by the same number of basis points; so with a DV01 hedge, there is not much the trader can do to allow for dispersion between nominal and real yields.
Assume that a trader is making a relative value trade, selling a U.S. Treasury bond and correspondingly purchasing a U.S. Treasury TIPS. Based on the current spread between the two securities, the trader shorts $100 million of the nominal bond and purchases $89.8 million of TIPS. The trader then starts to question the amount of the hedge due to changes in yields on TIPS in relation to nominal bonds. He runs a regression and determines from the output that the nominal yield changes by 1.0274 basis points per basis point change in the real yield. Would the trader adjust the hedge, and if so, by how much?【资料下载】FRM一级思维导图PDF版
B) Yes, by $2.46 million (purchase additional TIPS)
C) Yes, by $2.5 million (sell a portion of the TIPS)
D) Yes, by $2.11 million (Purchase additional TIPS)
解析：The trader would need to adjust the hedge as follow:
$89.8 million×1.0274 = $92.26 million
Thus, the trader needs to purchase additional TIPS worth $2.46 million.