You hold a $50 million portfolio of par value bonds with a coupon rate of 10% 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% and that T-bond futures contracts call for delivery of an 8% coupon (paid annually), 20-year maturity T-bond.
A)398 contracts long
B)524 contracts short
C)1048 contracts short
D)398 contracts short

Question

Quizplus · Accepted Answer

0.9864485 × $50 M = $49,322,425; $50,000,000 - $49,322,425 = $677,575 loss on bonds; $100.00 - $82.97 = $17.03 × 100 = $1,703 gain on futures; $677,575/$1,703 = 398 contracts short.

You Hold a $50 Million Portfolio of Par Value Bonds