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

A portfolio has a DV01 of $30,000 per basis point and is hedged by shorting 500 futures contracts, each with a DV01 of $60 per basis point (a DV01-matched hedge with no beta adjustment). Yields then rise 25 basis points on the portfolio, but the futures yield rises only 20 basis points. Ignoring convexity and carry, what is the net result?

The net result is a loss of $150,000. The portfolio loses 30,000 times 25, or $750,000, while the short futures gain 500 times 60 times 20, or $600,000. Because the yields did not move equally, the DV01-matched hedge is imperfect.

  1. ALoss of $150,000Correct
  2. BGain of $150,000
  3. CLoss of $750,000
  4. DZero, as the hedge is DV01-matched

Explanation

Portfolio loss = 30,000 × 25 = $750,000. Futures gain on the short = 500 × 60 × 20 = $600,000. Net = −$750,000 + $600,000 = −$150,000. A DV01 match only neutralises equal yield moves, so a yield-beta mismatch leaves residual risk.

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