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FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A portfolio manager has a bond portfolio with a DV01 of $42,000. She wants to hedge parallel yield shifts using Treasury futures whose DV01 is $70 per contract. Which position neutralizes the portfolio's DV01?

Short 600 futures contracts. The number of contracts equals the portfolio DV01 of $42,000 divided by the contract DV01 of $70, which is 600. The position must be short because the long bond portfolio loses when yields rise, and short futures gain.

  1. AShort 600 contractsCorrect
  2. BLong 600 contracts
  3. CShort 60 contracts
  4. DShort 2,940 contracts

Explanation

The hedge ratio is the portfolio DV01 divided by the futures DV01: 42,000 / 70 = 600 contracts. The portfolio loses when yields rise, so the manager must hold a position that gains when yields rise, which is a short futures position. A long position would double the exposure instead of offsetting it.

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