Hedging with futures II.4 You are holding $10 million face value of 30 year zero coupon US Treasury bonds. You want to set up a hedge of these bonds using the December T-bond futures contract. The fixed income research department has provided the following data: Price Face value DV01 US 30 year zeros 21.00 $10 million .061 Dec T-bond future 110.00 $100,000 .132 How many futures contracts should you trade? II.5. You are long $80 million face value of the 5 1/4 Nov 2028 US Treasury bonds. You would like to minimize your exposure to interest rate changes by setting up a hedge using the Chicago Board of Trade's Treasury bond futures contract. Explain how to set up the right hedge using two different approaches: the DV01 method and the regression method. Make sure unambiguous that a research assistant could execute your instructions and get the right hedge. a) How do you calculate the hedge ratio to use? b) How do you determine the number of futures contracts to trade to achieve that hedge ratio? II.6. Suppose you wanted to design a minimum risk hedge for a portfolio of blue chip stocks using S&P 500 index futures. Describe carefully what regression you would run to find the risk minimizing hedge ratio. Be explicit about what variables you would use and how you would set up the regression. Tell how you would convert the hedge ratio into a number of S&P 500 index futures contracts to trade.