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

A manager holds a $20,000,000 bond portfolio with a modified duration of 5.0 and is short 150 Treasury futures contracts, each with a DV01 of $70. If yields on both the portfolio and the futures rise by exactly 10 basis points, what is the approximate net result of the portfolio and futures combined?

The combined position gains about $5,000. The portfolio loses $100,000 from a 10 basis point rise (20 million times 5.0 times 0.001), while the 150 short futures gain $105,000 (150 times $70 times 10). The hedge is slightly over-sized, leaving a small net gain.

  1. AGain of $5,000Correct
  2. BLoss of $5,000
  3. CGain of $205,000
  4. DNet zero

Explanation

Portfolio loss = 20,000,000 x 5.0 x 0.001 = $100,000. Futures gain = 150 x 70 x 10 = $105,000. Net = +$5,000. A loss of $5,000 reverses the sign, $205,000 adds the two instead of netting them, and zero assumes a perfect hedge, which the 150 contracts do not give.

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