Hello,
Can you explain how did the solution below arrived to short the contracts. I was thinking other way round ie., long the contracts and couldn't get it whether it should be long / short.
Question:
173.2. A portfolio manager wants to hedge her bond portfolio this is worth $30 million and will have a duration of 6.0 years at maturity of the hedge in a few months. The relevant U.S. Treasury bond futures price is 95-12 and the cheapest-to-delivery (CTD) bond will have a duration of 9.1 years at hedge maturity. What is the trade that hedges against interest rate movements? a) Long 57 contracts b) Long 207 contracts c) Short 57 contracts d) Short 207 contracts
Answer:
Number of contracts (N*) = (Portfolio value * duration of portfolio) / (futures contract price * duration of futures contract underlying bond). In this case, N* = (30,000,000 * 6.0 ) / (95,375 * 9.1) = 207.39; i.e., short 207 contracts
Can you explain how did the solution below arrived to short the contracts. I was thinking other way round ie., long the contracts and couldn't get it whether it should be long / short.
Question:
173.2. A portfolio manager wants to hedge her bond portfolio this is worth $30 million and will have a duration of 6.0 years at maturity of the hedge in a few months. The relevant U.S. Treasury bond futures price is 95-12 and the cheapest-to-delivery (CTD) bond will have a duration of 9.1 years at hedge maturity. What is the trade that hedges against interest rate movements? a) Long 57 contracts b) Long 207 contracts c) Short 57 contracts d) Short 207 contracts
Answer:
Number of contracts (N*) = (Portfolio value * duration of portfolio) / (futures contract price * duration of futures contract underlying bond). In this case, N* = (30,000,000 * 6.0 ) / (95,375 * 9.1) = 207.39; i.e., short 207 contracts