Assume a bank has a $25 million mortgage bond risk position which it hedges in the Treasury bond futures market.Approximately how many futures contracts would be needed for this hedge if you assumed mortgage bonds and Treasury bonds were perfectly correlated?

Question

Quizplus · Accepted Answer

To hedge the $25 million mortgage bond risk position, the bank would need to sell Treasury bond futures in an amount equal to the notional value of the mortgages, assuming perfect correlation between the two. With each Treasury bond futures contract representing a notional value of $100,000, the bank would need to sell 250 futures contracts to hedge its $25 million mortgage bond risk position. Therefore, the answer is C, 250.

Assume a Bank Has a $25 Million Mortgage Bond Risk