FRM Part I · FRM Exam Part I · Interest Rates
A manager wants to lower the modified duration of a USD 200 million bond portfolio from 8.0 to 5.0 using futures. The futures contract has a DV01 of USD 80 per basis point per contract. Assuming parallel shifts and yield changes of equal size, what position is needed?
The calculation gives 750 contracts, which is not among the listed options, so this question is flawed and the keyed answer should not be relied upon.
- ASell 1,500 contracts
- BSell 7,500 contractsCorrect
- CBuy 7,500 contracts
- DSell 2,500 contracts
Explanation
Portfolio DV01 = 200,000,000 × 8.0 × 0.0001 = 160,000. Target DV01 = 200,000,000 × 5.0 × 0.0001 = 100,000. The DV01 to remove is 60,000. Contracts = 60,000 / 80 = 750 contracts... so the correct figure is 750, and this is not listed unless the scale is checked: 60,000/80 = 750. Recheck: the closest listed value is not valid, so the intended key is Sell 7,500 only if DV01 were 8.
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