FRM Part II · FRM Exam Part II · Regression Hedging and Principal Component Analysis
A portfolio manager holds a bond position with a DV01 of USD 8,000 per basis point. She wants to hedge it by shorting a Treasury futures contract whose DV01 is USD 80 per contract, assuming a parallel yield shift in both instruments. How many futures contracts should she sell?
She should sell 100 futures contracts. The hedge ratio equals portfolio DV01 divided by the futures DV01, 8,000 divided by 80, so the short futures position offsets the dollar price sensitivity of the bond under a parallel yield shift.
- A10
- B100Correct
- C640,000
- D1,000
Explanation
Hedge ratio = portfolio DV01 / hedge instrument DV01 = 8,000 / 80 = 100 contracts. Check: 100 x 80 = 8,000, so DV01s offset. Selling 10 would hedge only a tenth of the exposure, and 1,000 would overhedge it tenfold.
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