A manager wishes to hedge a bond with a par value of $20 million by selling Treasury bond futures. Suppose that (1) the conver- sion factor for the cheapest-to-deliver issue is 0.91, (2) the price value of a basis point of the cheapest-to-deliver issue at the set- tlement date is 0.06895, and (3) the price value of a basis point of the bond to be hedged is 0.05954.

a. What is the hedge ratio?

b. How many Treasury bond futures con- tracts should be sold to hedge the bond?

AppendixLO1