Suppose you wish to hedge a bond portfolio with a Treasury bond futures contract. If the duration of your portfolio increases, the number of contracts needed to hedge your portfolio will:
A) increase.
B) decrease.
C) not change.
D) increase only if the duration of the portfolio is greater than the duration of the futures.
E) decrease only if the duration of the portfolio is greater than duration of the futures.

Question

Quizplus · Accepted Answer

The number of contracts needed to hedge a bond portfolio with a Treasury bond futures contract increases when the duration of the portfolio increases. Duration is a measure of the sensitivity of the bond portfolio to changes in interest rates. When the duration of the portfolio increases, the sensitivity to interest rate changes also increases, which means that more contracts are needed to fully hedge the portfolio.

Suppose You Wish to Hedge a Bond Portfolio with a Treasury