A bond portfolio manager expects a cash outflow of $35,000,000.The manager plans to hedge potential risk with a Treasury futures contract with a value of $105,215.The conversion factor between the CTD and the bond specified in the Treasury futures contract is 0.85.The duration of bond portfolio is 8 years,and the duration of the CTD bond is 6.5 years.Indicate the number of contracts required and whether the position to be taken is short or long.
A) 333 contracts short
B) 333 contracts long
C) 348 contract short
D) 348 contracts long
E) None of the above

Question

Quizplus · Accepted Answer

Number of contracts
$= ( 35000000 / 105215 ) ( 0.85 ) ( 8 / 6.5 )$
$$= 348.01$$ 348 contracts short

A Bond Portfolio Manager Expects a Cash Outflow of $35,000,000