Skip to content

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

A portfolio manager holds $20 million of bonds with a modified duration of 5.0. Treasury bond futures trade at a contract value of $125,000 with a duration of 8.0 for the cheapest-to-deliver bond. Using the duration-based hedge ratio to fully hedge against small parallel yield shifts, what position is required?

Short 100 contracts. The hedge ratio is portfolio value times portfolio duration divided by futures value times futures duration, which gives 100 million over 1 million. A bond portfolio loses when yields rise, so the manager must sell futures to offset the loss.

  1. AShort 100 contractsCorrect
  2. BLong 100 contracts
  3. CShort 160 contracts
  4. DShort 256 contracts

Explanation

N = (P × Dp)/(F × Df) = (20,000,000 × 5.0)/(125,000 × 8.0) = 100,000,000/1,000,000 = 100. The portfolio loses value when yields rise, so the futures must be sold. Short 160 ignores the duration ratio (20m/125k only), and short 256 inverts the duration ratio.

Did you get it right without looking?

One question tells you little. A timed set on Interest Rate Futures shows your real accuracy, how long you take and where you lose marks.

Practise Interest Rate FuturesFree diagnostic mock

More Interest Rate Futures questions