Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if the futures contract has a price of $90,000 and a modified duration of 8.5 years.
A)16.27
B)15.93
C)7.42
D)11.11
E)none of the above

Question

Quizplus · Accepted Answer

The optimal hedge ratio is calculated using the formula: (Modified Duration of Bonds / Modified Duration of Futures) * (Value of Bonds / Price of Futures). Plugging in the values: (12.45 / 8.5) * (1,000,000 / 90,000) = 16.27.

Determine the Optimal Hedge Ratio for Treasury Bonds Worth $1,000,000