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

A fund manager holds a bond portfolio with a DV01 of $45,000 and wants to reduce this to a target DV01 of $10,000 using Treasury futures. Each futures contract has a DV01 of $90. Approximately how many futures contracts should be sold?

About 389 contracts should be sold. The manager needs to remove $35,000 of DV01 (45,000 minus the 10,000 target), and each contract offsets $90, so 35,000 divided by 90 is roughly 389. Selling 500 would hedge the full exposure and overshoot the target.

  1. A389Correct
  2. B500
  3. C111
  4. D194

Explanation

The DV01 to remove is 45,000 - 10,000 = $35,000. Dividing by $90 per contract gives 388.9, or about 389 contracts sold. Selling 500 would remove the entire DV01 and not just the targeted reduction.

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