Question

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?

Answer 1

200 contracts

Step-by-step 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