Skip to content

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

A portfolio manager holds a $20,000,000 Treasury portfolio with a duration of 6.0 years. Treasury bond futures are priced at 105.00 per $100 of face value, with a contract size of $100,000, and the cheapest-to-deliver bond implies a futures duration of 8.0 years. To hedge against rising interest rates using the duration-based hedge ratio, which position is closest to the appropriate hedge?

Short about 143 contracts. The duration-based hedge ratio is portfolio value times portfolio duration divided by futures price times futures duration: 20,000,000 x 6 / (105,000 x 8) = 142.86. A short position gains when rates rise, offsetting portfolio losses.

  1. AShort 143 contractsCorrect
  2. BLong 143 contracts
  3. CShort 190 contracts
  4. DShort 254 contracts

Explanation

Contract value is 105,000. N = (20,000,000 x 6.0) / (105,000 x 8.0) = 120,000,000 / 840,000 = 142.86, about 143. The manager loses if rates rise, so must short futures. Ignoring durations gives 190, and inverting the duration ratio gives 254; both are wrong.

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