You hold a $50 million portfolio of par value bonds with a coupon rate of 10 percent paid annually and 15 years to maturity.How many T-bond futures contracts do you need to hedge the portfolio against an unanticipated change in the interest rate of 0.18%? Assume the market interest rate is 10 percent and that T-bond futures contracts call for delivery of an 8 percent coupon,paid annually 20-year _______ maturity T-bond.

Question

Quizplus · Accepted Answer

To hedge the portfolio, you need to calculate the duration of the bonds and the futures, then use the duration-based hedge ratio. The portfolio and futures have different durations due to different coupon rates and maturities. The correct number of contracts is determined by the hedge ratio, which results in 398 contracts short.

You Hold a $50 Million Portfolio of Par Value Bonds