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FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A bond portfolio has a DV01 of $48,000. A risk manager wants to neutralize interest rate exposure using futures contracts that each have a DV01 of $80. Which hedge is appropriate?

Sell 600 futures contracts. The number needed is the portfolio DV01 divided by contract DV01, 48,000/80 = 600, and the position must be short because the long bond portfolio loses when yields rise while short futures gain.

  1. ABuy 600 contracts
  2. BSell 60 contracts
  3. CSell 6,000 contracts
  4. DSell 600 contractsCorrect

Explanation

The hedge ratio is portfolio DV01 divided by contract DV01 = 48,000 / 80 = 600 contracts. The portfolio loses value when yields rise, so the hedger must sell futures, which gain when yields rise. Buying 600 would double the exposure rather than offset it.

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