Question
Joe Cummings is the fixed income manager of a large Canadian pension fund. The present value of the pension funds portfolio of assets is CAD
Joe Cummings is the fixed income manager of a large Canadian pension fund. The present value of the pension funds portfolio of assets is CAD 4 billion while the expected present value of the funds liabilities is CAD 5 billion. The respective modified durations are 9.254 and 6.825 years. The fund currently has an actuarial deficit (assets < liabilities) and Joe must avoid widening this gap. There are currently two scenarios for the yield curve: The first scenario is a downward shift of 25bp, with the second scenario an upward shift of 25bp. The most liquid interest rate futures contract has a present value of CAD 68,336 and a duration of 2.1468 years. Analyzing both scenarios separately, what should Joe do to avoid widening the pension fund gap? Choose the best answer. Scenario 1 Scenario 2 (a) Short futures Long futures (b) Long futures Short futures (c) Short futures Short futures (d) Long futures Long futures
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