A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110 and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of the portfolio will be 5.5 years. How many contracts are necessary for hedging the portfolio?

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Business

Edgar Chavez

6 November, 09:40

A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110 and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of the portfolio will be 5.5 years. How many contracts are necessary for hedging the portfolio?

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Leticia Michael · Answer 1

200 contracts

Explanation:

The computation of the number of contracts would be

= (Portfolio * duration of the portfolio) : (Future price of treasury note * face value * expected duration of the bond)

= ($24,000,000 * 5.5 years) : (110% * $100,000 * 6)

= $132,000,000 : $660,000

= 200 contracts

We assume the future price of treasury note in percentage