Suppose that all rates increase over the next 3 months, but long-term rates increase less than… 1 answer below »

A portfolio manager plans to use a Treasury bond futures contract to hedge a bondportfolio over the next 3 months. The portfolio is worth $100 million and will have aduration of 4.0 years in 3 months. The futures price is 122, and each futures contract is on$100,000 of bonds. The bond &at is expected to be cheapest to deliver will have aduration of 9.0 years at the maturity of the futures contract. What position in futurescontracts is required?(a) What adjustments to the hedge are necessary if after 1 month the bond that isexpected to be cheapest to deliver changes to one with a duration of 7 years?(b) Suppose that all rates increase over the next 3 months, but long-term rates increaseless than short-term and medium-term rates. What is the effect of this on theperformance of the hedge?

 

Looking for a Similar Assignment? Hire our Top Techical Tutors while you enjoy your free time! All papers are written from scratch and are 100% Original. Try us today! Active Discount Code FREE15