FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01
A bank holds a bond portfolio with a DV01 of $54,000 and wants to neutralize its exposure to a parallel yield shift using interest rate futures. Each futures contract has a DV01 of $80. Which hedge is appropriate?
The bank should short 675 futures contracts. A short futures position gains when yields rise, offsetting portfolio losses. The hedge ratio equals the portfolio DV01 divided by the contract DV01, which is 54,000 divided by 80, giving 675 contracts.
- AShort 675 contractsCorrect
- BLong 675 contracts
- CShort 540 contracts
- DShort 6,750 contracts
Explanation
The portfolio loses value when yields rise, so the hedge must gain when yields rise, which requires shorting futures. The number of contracts is 54,000 / 80 = 675. Going long would double the exposure, and 6,750 comes from a decimal error.
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