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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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  1. 6 November, 11:57
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    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
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