A mortgage banker had made loan commitments for $10 million in 3 months.How many contracts on Treasury bonds futures must the banker write or buy?

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Quizplus · Accepted Answer

The mortgage banker has made loan commitments for $10 million in 3 months, which means the banker is exposed to interest rate risk as the prevailing interest rates may change over the next 3 months. By going short on Treasury bond futures, the mortgage banker can hedge against this risk. The appropriate number of contracts depends on the duration and yield of the underlying bonds. Assuming a duration of 7 and a yield of 2.5%, the appropriate number of contracts to hedge $10 million in mortgage loans is approximately 100. Therefore, option B) is the best choice.

A Mortgage Banker Had Made Loan Commitments for $10 Million