box A choices ( buy/sell)

Box B1 Choices ( decline/inclineot change)

Box B2 Choices ( inflow/outflow)

Box B3 Choices ( zero/the change in value of the original portfolio/the cash flow from the hedge position)

Box C Choices (I,III,IV/ II,III,IV/ I,II,III/ I,II,IV)

Problem 15-03 June Klein, CFA, manages a $100 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 Conversion Factor Portfolio Value / Modified Basis Point for Cheapest to Future Contract Security Duration Value Deliver Bond Price Portfolio 10 years $100,000.00 Not Applicable $100,000,000 U.S. Treasury bond 8 years $75.28 94-03 futures contract 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 of 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 act by $ 2. The Treasury bond futures position. The total cash e et 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 Mures 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. TII. Immunization is would remain even after execution of the strategy, because of the possibility of non-parallel shifts in the yield curve IV. Basis risk also exists between the T-bondtures and spot T-bonds, so that there would still be risk even if the government portfolio held only T-bonds