FRM Part I · FRM Exam Part I · Modeling Non-Parallel Term Structure Shifts and Hedging
A fund holds a bond portfolio with a DV01 of $48,000. It hedges with Treasury futures that have a DV01 of $80 per contract, assuming parallel yield shifts. What position is required to DV01-hedge the portfolio?
The fund should short 600 futures contracts. Dividing the portfolio DV01 of $48,000 by the futures DV01 of $80 gives 600 contracts, and the position must be short so that the futures gain when yields rise and offset the bond losses.
- AShort 600 contractsCorrect
- BLong 600 contracts
- CShort 60 contracts
- DShort 6,000 contracts
Explanation
The number of contracts is 48,000 / 80 = 600. The portfolio loses value when yields rise, so the hedge must gain when yields rise, which requires a short futures position. A long position would double the exposure.
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