You want to hedge a $2M 8 year loan which you are planning to borrow with 10 Year Note Futures contract, which is trading at 140 today (One contract is 100,000 par). The duration of the loan is 6 years and the duration of the 10 year note is 8 years. Assume beta measuring the fluctuation in the loan rate relative to the 10 year note rate is .7 . How many contracts should you use to hedge the loan in order to reduce as much risk as possible?

• A. 7.5
• B. 8.2
• C. 7.1
• D. 9.5

Continue with the same problem above. But this time, you do not want to minimize risk. Instead, you just want to reduce the duration for the loan from 6 years to 1 year. How many contracts do you need to reduce the duration to 1 year?

• A. 6.25
• B. 7.85
• C. 8.45
• D. 9.75