Skip to content

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

A portfolio manager holds a bond position with a DV01 of USD 42,000. She hedges with a Treasury futures contract whose DV01 is USD 84 per contract, assuming parallel yield shifts and equal yield betas. How many futures contracts should she trade to neutralize the interest rate exposure?

She should sell 500 futures contracts. The number is the portfolio DV01 divided by the contract DV01 (42,000 ÷ 84 = 500), and selling is needed because a long bond loses when yields rise while short futures gain.

  1. ASell 500 contractsCorrect
  2. BBuy 500 contracts
  3. CSell 5,000 contracts
  4. DSell 50 contracts

Explanation

Hedge ratio = 42,000 / 84 = 500 contracts. A long bond position loses value when yields rise, so she must sell futures, which gain when yields rise. Buying would double the exposure. 5,000 and 50 are scale errors.

Did you get it right without looking?

One question tells you little. A timed set on Applying Duration, Convexity, and DV01 shows your real accuracy, how long you take and where you lose marks.

Practise Applying Duration, Convexity, and DV01Free diagnostic mock

More Applying Duration, Convexity, and DV01 questions