FUTURES POSITION TO HEDGE PORTFOLIO

An investor wishes to hedge a bond with a par value of $200 million with Treasury bond futures. Assume that (1) the conversion factor for thecheapest-to-deliver issue is 1.0234; (2) the price value of a basis point (PV01) of the cheapest-to-deliver issue at the settlement date is 0.0812 and (3) the pricevalue of a basis point (PV01) for the bond to be hedged is 0.0780.

(a) What is the hedge ratio?

(b) How many Treasury bond futures should be purchased/sold to hedge the bond?

show formulas.