Suppose you want to hedge a $290 million bond portfolio with a duration of 9 yea

Question

Suppose you want to hedge a $290 million bond portfolio with a duration of 9 years using 10-year Treasury note futures with a duration of 6 years, a futures price of 107, and 113 days to expiration. The multiplier on Treasury note futures is $100,000. How many contracts do you buy or sell? (Round your answer to the nearest whole number.)

Suppose you want to hedge a $290 million bond portfolio with a duration of 9 years using 10-year Treasury note futures with a duration of 6 years, a futures price of 107, and 113 days to expiration. The multiplier on Treasury note futures is $100,000. How many contracts do you buy or sell? (Round your answer to the nearest whole number.)

Explanation / Answer

For hedging,

Change in value of bond portfolio = change in value of short positions in futures( treasury)

290000000 * 9 = 107 * 6 * number of treasury position

= (29000000*9/6)/107 = 4065420.561

Number of contracts = number of treasury position/ multiplier = 4065420.561/100000 = 40.654

= short 41 contracts in treasury futures

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