# June Klein, manages a $100 million (market value) U.S

June Klein, manages a $100 million (market value) U.S. governments Bond portfolio for an institution

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Security

Modified

Duration

Basis Point

Value

Conversion Factor

for cheapest to

deliver Bond

Portfolio Value/Future

Contract Price

Portfolio

10 Years

$100,000

Not Applicable

$100,000

U.S Treasury

Bond Futures

Contract

8 Years

$75.32

1

94-05

94.15625%

June Klein, manages a $100 million (market value) U.S. governments Bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the portfolio against any such change.

a. Discuss two reasons for using futures rather than selling bonds to hedge a bond portfolio. No calculations required.

b. Formulate Klein’s hedging strategy using only the futures contract shown. Calculate the number of future contracts to implement the strategy. Show all calculations.

c. Determine how much of the following would change in value if interest rates increase by 10 basis points as anticipated. Show all calculations.

1. The original portfolio

2. The Treasury bond futures position

3. The newly hedged portfolio

d. State three reasons why Klein’s hedging strategy might not fully protect the portfolio against interest rate risk.

e. Describe a zero-duration hedging strategy using only the government bond portfolio and options on U.S. Treasury bond futures contracts. No calculations required.

[Pin It]

Security

Modified

Duration

Basis Point

Value

Conversion Factor

for cheapest to

deliver Bond

Portfolio Value/Future

Contract Price

Portfolio

10 Years

$100,000

Not Applicable

$100,000

U.S Treasury

Bond Futures

Contract

8 Years

$75.32

1

94-05

94.15625%

June Klein, manages a $100 million (market value) U.S. governments Bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the portfolio against any such change.

a. Discuss two reasons for using futures rather than selling bonds to hedge a bond portfolio. No calculations required.

b. Formulate Klein’s hedging strategy using only the futures contract shown. Calculate the number of future contracts to implement the strategy. Show all calculations.

c. Determine how much of the following would change in value if interest rates increase by 10 basis points as anticipated. Show all calculations.

1. The original portfolio

2. The Treasury bond futures position

3. The newly hedged portfolio

d. State three reasons why Klein’s hedging strategy might not fully protect the portfolio against interest rate risk.

e. Describe a zero-duration hedging strategy using only the government bond portfolio and options on U.S. Treasury bond futures contracts. No calculations required.

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