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FRM Part I · FRM Exam Part I · Interest Rate Futures

A bank's bond book has a DV01 of $42,000 (the loss for a one basis point rise in yields). The bank hedges using a futures contract whose DV01 is $84 per contract. Assuming parallel shifts and equal yield changes for the book and the futures, how should the bank position the hedge?

The bank should short 500 contracts. Dividing the book's DV01 of $42,000 by the futures DV01 of $84 gives 500 contracts. Because the bond book loses when yields rise, the futures must be sold short so they gain by the same amount per basis point.

  1. AShort 500 contractsCorrect
  2. BLong 500 contracts
  3. CShort 50 contracts
  4. DShort 5,000 contracts

Explanation

The DV01 hedge ratio is portfolio DV01/futures DV01 = 42,000/84 = 500. The book loses when yields rise, so the bank shorts futures to gain in that case. Long 500 has the wrong sign, and the other counts come from misplacing decimals.

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