2 You are worried that interest rates might go up in 3 months and that your portfolio might lose value. 3 You have at your disposition Treasury bond futures contracts trading at 94-04. 4 Assume your portfolio duration in 3 months is expected to be 4.8 years and that the cheapest-to-deliver bond in 3 months will have a 7.7 year duration 5 6 a) Do you go long or short with the contracts? 7 b) How many contracts do you buy or sell? 8 c) Suppose that interest rates did indeed go up, and that your portfolio went down to $302 million (i.e. the bond portfolio lost $38 million): 9 The new futures price quote is 77-10. Show the Dolllar gains on the futures contracts position. Show your net Dollargains/losses combining the bond portfolio loss with the futures contracts gains. 10 2 You are worried that interest rates might go up in 3 months and that your portfolio might lose value. 3 You have at your disposition Treasury bond futures contracts trading at 94-04. 4 Assume your portfolio duration in 3 months is expected to be 4.8 years and that the cheapest-to-deliver bond in 3 months will have a 7.7 year duration 5 6 a) Do you go long or short with the contracts? 7 b) How many contracts do you buy or sell? 8 c) Suppose that interest rates did indeed go up, and that your portfolio went down to $302 million (i.e. the bond portfolio lost $38 million): 9 The new futures price quote is 77-10. Show the Dolllar gains on the futures contracts position. Show your net Dollargains/losses combining the bond portfolio loss with the futures contracts gains. 10