Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 7.5 basis points for every 20.25-basis- point move in the yield on 5 - year bonds. You hold a $ 1.2 million portfolio of 5-year maturity bonds with modified duration 4 years and desire to hedge your interest rate exposure with T - bond futures, which currently have modified duration 9 years and sell at F 0 = $80. How many futures contracts should you sell? Note: Do not round intermediate calculations. Round your final answer to the nearest whole number. I tried the answers 2 and 18, both of which were wrong. I don 't know how to calculate them. An expert's reply of 667 is also wrong.
Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 7.5 basis points for every 20.25-basis- point move in the yield on 5 - year bonds. You hold a $ 1.2 million portfolio of 5-year maturity bonds with modified duration 4 years and desire to hedge your interest rate exposure with T - bond futures, which currently have modified duration 9 years and sell at F 0 = $80. How many futures contracts should you sell? Note: Do not round intermediate calculations. Round your final answer to the nearest whole number. I tried the answers 2 and 18, both of which were wrong. I don 't know how to calculate them. An expert's reply of 667 is also wrong.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Yields on short-term bonds tend to be more volatile
than yields on long-term bonds. Suppose that you
have estimated that the yield on 20-year bonds
changes by 7.5 basis points for every 20.25-basis-
point move in the yield on 5 - year bonds. You hold a $
1.2 million portfolio of 5-year maturity bonds with
modified duration 4 years and desire to hedge your
interest rate exposure with T - bond futures, which
currently have modified duration 9 years and sell at F
0 = $80. How many futures contracts should you sell?
Note: Do not round intermediate calculations. Round
your final answer to the nearest whole number. I tried
the answers 2 and 18, both of which were wrong. I don
't know how to calculate them. An expert's reply of 667
is also wrong.
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