question archive An investor holds a bond portfolio with principal value $10,000,000 whose price and modified duration are respectively 112 and 9
An investor holds a bond portfolio with principal value $10,000,000 whose price and modified duration are respectively 112 and 9
Subject:FinancePrice: Bought3
An investor holds a bond portfolio with principal value $10,000,000 whose price and modified
duration are respectively 112 and 9.21. He wishes to be hedged against a rise in interest rates by
selling futures contracts written on a bond. Suppose the price of the cheapest-to-deliver issue is
105.2. The nominal amount of the futures contract is $100,000. The conversion factor for the
cheapest-to-deliver is equal to 0.981. The cheapest-to-deliver has a modified duration equal to 8.
Additionally, assume that if the yield of portfolio changes by 25 basis points, the yield of
cheapest-to-deliver issue changes by 70 basis points. What is the number of futures contracts
that the investor has to sell to hedge against a rise in interest rates?
