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FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging

A bond portfolio has a DV01 of $42,000. A risk manager hedges with Treasury futures, each with a DV01 of $84, to neutralize parallel yield-curve risk. Which position is required?

Sell 500 futures contracts. The portfolio is long bonds and loses when yields rise, so a short futures position offsets it. The hedge ratio is the portfolio DV01 divided by the contract DV01, 42,000 divided by 84, which gives 500.

  1. ABuy 500 contracts
  2. BSell 500 contractsCorrect
  3. CSell 5,000 contracts
  4. DSell 50 contracts

Explanation

The long bond portfolio loses when yields rise, so the hedge must gain in that case, which requires a short futures position. The number of contracts is 42,000 / 84 = 500. Buying would double the exposure; 5,000 and 50 are scaling errors.

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