1 Chapter 15: Assignment - An Introduction to Derivative Markets and Securities Back to Assignment Attempts 5 6 Average 5.5/8 3. Problem 15-03 eBook Problem 15-03 June Klein, CFA, manages a $300 million (market value) U.S. government bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the portfolio against any such change. PORTFOLIO AND TREASURY BOND FUTURES CONTRACT CHARACTERISTICS Security Portfolio U.S. Treasury bond Modified Duration 9 years 8 years Basis Point Value $270,000.00 $205.67 for Cheapest to Deliver Bond Not Applicable Conversion Factor Portfolio Value / Future Contract Price $300,000,000 1 95-07 futures contract A-Z a. Formulate Klein's hedging strategy using only the futures contract shown. Calculate the number of futures contracts to implement the strategy. Do not round intermediate calculations. Round your answer up to the nearest whole number. Klein's hedging strategy is to -Select- futures contracts. b. Determine how each of the following would change in value if interest rates increase by 8 basis points as anticipated. Use the rounded value of the number of futures contracts from part a. Round your answers to the nearest dollar. Enter your answers as positive values. 1. The original portfolio. The market value of the original portfolio will -Select- by $ 2. The Treasury bond futures position. The total cash -Select- from the futures position will be $ 3. The newly hedged portfolio. Theoretically, the change in the value of the hedged portfolio is -Select- c. State three reasons why Klein's hedging strategy might not fully protect the portfolio against interest rate risk. I. Because fractional futures contracts cannot be sold, the duration may not be able to be set exactly to zero. II. If interest rates decrease Klein's hedging strategy can not be applied. It means that the strategy protects the portfolio only against increase in interest rate. III. The volatility of the yield between the T-bond futures and the government bond portfolio may not be one-to-one. -Select- IV. This may still be a cross-hedge, because the government bonds in the portfolio may not be the same as the cheapest-to-deliver bond. Grade it Now Save & Continue Continue without saving