Suppose the cheapest-to-deliver bond deliverable against the Treasury bond futures contract changes. The new bond has a shorter duration than the previous bond. This will __________ the number of contracts needed to hedge a bond portfolio.
A) increase
B) decrease
C) not change
D) The price of the Treasury bonds is needed to answer the question.
E) The maturity of the Treasury bonds is needed to answer the question.

Question

Quizplus · Accepted Answer

When the cheapest-to-deliver bond has a shorter duration, more contracts are needed to achieve the same hedge because the shorter duration bond has less interest rate sensitivity. Therefore, to match the duration of the bond portfolio being hedged, an increased number of futures contracts would be required.

Suppose the Cheapest-To-Deliver Bond Deliverable Against the Treasury Bond Futures