FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01
A portfolio manager holds bonds with a total DV01 of $42,500 and wants to hedge parallel yield shifts using interest rate futures, each with a DV01 of $85. Which hedge is appropriate?
Short 500 futures contracts. The number of contracts equals portfolio DV01 divided by futures DV01, which is 42,500 / 85 = 500. The position must be short because the bond portfolio loses value when yields rise and the short futures gain by the same amount.
- AShort 500 futures contractsCorrect
- BLong 500 futures contracts
- CShort 5,000 futures contracts
- DShort 425 futures contracts
Explanation
The hedge ratio is portfolio DV01 divided by futures DV01 = 42,500 / 85 = 500 contracts. A long bond portfolio loses when yields rise, so the futures must be shorted to gain in that scenario. Long 500 would double the exposure. 5,000 and 425 come from decimal-place 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.
More Applying Duration, Convexity, and DV01 questions
- Which statement about a callable bond that exhibits negative convexity at current yields is correct?
- A desk is long Bond A with a DV01 of $12,000 and short Bond B with a DV01 of $7,500. Assuming a small parallel upward shift of 10 basis poin…
- A bond has key rate durations of 0.5 at the 2-year point, 3.0 at the 5-year point, and 4.5 at the 10-year point, and none elsewhere. The 2-y…
- A $200 million bond portfolio has a modified duration of 5 and a convexity of 40. Yields rise by 100 basis points in a parallel shift. Using…
- A bond is priced at 100.00 at its current yield. If the yield falls by 10 basis points the price is 100.80, and if it rises by 10 basis poin…
- A bond trades at a price of 105 with a modified duration of 7 and a convexity of 60. If its yield falls by 100 basis points, what is the app…