A bond fund manager is concerned about interest rate volatility over the next 3 months. The...
A bond fund manager is concerned about interest rate volatility over the next 3 months. The value of the bond portfolio is $9M and the duration of the portfolio is 6.2 years. To hedge interest rate volatility, the fund manager uses Treasury bond futures. The quoted price for the December Treasury bond futures contract is 93-05. The cheapest to deliver Treasury bond has a duration of 7.9 years. How many contracts should the fund manager short?
(Enter as positive number, even though it's a short. Round to the nearest contract. Precision: 1 +/- 0.5)
Homework Answers
The number of Treasury bond Futures contract that need to be shorted is given by formula
(Portfolio value/Price of T-Bond)*(duration of the portfolio/duration of Cheapest to deliver bond)
contracts should the fund manager short = (9000000/93.05)*(6.2/7.9) = 75908.56 or 75909
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