Hedging a Bond Portfolio with T-Bond futures

Question

A portfolio manager uses a T-bond futures contract to hedge a bond portfolio over the next 4 months. The portfolio is worth $75 million and will have duration of 5 years in four months. The futures price is 118 and each contract is for $200,000. There are three bonds that can be delivered with durations 7, 8 and 9 years but it is unclear which will be the cheapest to deliver.

1.    If you expect interest rates to rise over the next 4 months, which duration bond will likely be the cheapest to deliver?
2.    What maturity T-bond futures contract should be used to hedge the bond portfolio?
3.    What position of futures contrasts is required?
4.    What adjustment is necessary in one month if you are wrong in your initial assessment that rates would rise; instead you now expect rates to fall?
5.    How will your adjusted position effect the performance of the hedge if long term rates fall more than short term rates

Summary

The question belongs to Finance and it is about Swaps. The question here is about T-bond futures being hedged for 4 months with futures prices being given. Given such a situation, questions such as determining the cheapest bond, the maturity T-bond to be used for hedging, the position of futures contrasts and the adjustments necessary for better positioning the hedge, etc have been given in the solution.

Total Word Count 168


 

Download Full Solution

Comments

  • HWA
    Rasha

    this is a very good website

  • HWA
    maani

    I have 50 questions for the same test your page is showing only 28

  • HWA
    joeanne

    hi can you please help or guide me to answer my assignments. thanks

  • HWA
    joeanne

    hi can anyone help or guide me to my assignments. thanks

  • HWA
    Monik


  • HWA
    Cristina

    This solution is perfect ...thanks

  • HWA
    Janete

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA
    Sandeep

    Perfect bank of solution. 

  • HWA
    Oxana

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA
    Giuseppe

    works fine.