A member of an investment committee, interested in learning more about fixed- income investment procedures, recalls that a fixed-income manager recently stated that derivative instruments could be used to control portfolio duration, saying “a futures-like position can be created in a portfolio by using put and call options on Treasury bonds.”
a. Identify the options market exposure or exposures that create a “futures-like position” similar to being long Treasury bond futures. Explain why the position you created is similar to being long Treasury bond futures.
b. Explain in which direction and why the exposure(s) you identified in part (a) would affect portfolio duration.
c. Assume that a pension plan’s investment policy requires the fixed-income manager to hold portfolio duration within a narrow range. Identify and briefly explain circumstances or transactions in which the use of Treasury bond futures would be helpful in managing a fixed-income portfolio when duration is constrained.
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