Hedging

[sucheta_isi]

David,

I couldn't understand under which section I can put this question. So I started this new forum.

While reading the chapter on Hedging Linear Risk from Jorion there was a question:

Q: Roughly how many 3-month LIBOR Eurodollar futures contracts are needed to hedge a position in a $200 million, 5 year receive-fixed swap?

While giving the answer they have stated that the dollar duration of a 5 year 6% par bond is about 4.3 years.

BUT my question is from where they are getting this "6% par bond"? Am I missing anything?

 

[David Harper CFA FRM]

sray - what is the specific source? the dollar duration = mod duration * price. 4.3 years refers to Macaulay duration. Dollar duration, here, would be more like >> 4.3 * 100 par * P = 4300 * P ... which is not a mistake Jorion would make. Are you sure this is Jorion handbook? i.e., i don't know either, given the facts you wrote ....
...maybe it is a swap that receives 6% fixed?

- David

 

[sucheta_isi]

I just copied the question from that book. It seems it was an FRM 1999 question( Question 109)

 

[David Harper CFA FRM]

okay, i see it: yea, that question's got two mistakes. You are right, you can't know the 6% to inform the duration. Plus it incorrectly uses a Mac duration (4.3 years) where is should use a Mod duration. Recommend you ignore it

that's the thing about the handbook: Jorion wrote the text, and he is very precise. But he didn't write the example questions, which contain errors

...David