Based on the price sensitivity hedge ratio approach, what is the optimal number of futures contracts to deploy, given the following information. The yield beta is 0.65, the present value of a basis point change for the underlying bond portfolio is $33,000, and the present value of a basis point change for the bond futures contract is $325. (Select the closest answer.)
A) long 100 futures contracts
B) long 55 futures contracts
C) short 66 futures contracts
D) short 22 futures contracts
E) short 11 futures contracts

Question

Quizplus · Accepted Answer

To calculate the optimal number of futures contracts to deploy, we use the formula:
Optimal number of contracts = (yield beta x PVBP of the bond portfolio) / (PVBP of the futures contract)
= (0.65 x $33,000) / $325
= 66.15 
Since we cannot trade in fractional contracts, we round down to the nearest whole number, which is 66. This means that we should short 66 futures contracts.

Based on the Price Sensitivity Hedge Ratio Approach, What Is