Reference no: EM133070859
You are working for a small bond portfolio manager. Your portfolio consists of the following Australian CGS: 10yr semi-annual coupon paying bond with a coupon rate of 3%p.a and a YTM of 1.5%. (Hold 3 of these bonds) 5yr semi-annual coupon paying bond with a coupon rate of 2.5% p.a and a YTM of 1.25%. (Hold 5 of these bonds) 3yr semi-annual coupon paying bond with a coupon rate of 2.0% p.a and a YTM of 1%. (Hold 3 of these bonds) With all three bonds having a face value of $100000
You have limits of the duration of your portfolio. The duration of you bond portfolio must be between 4 and 6 years.
Given your view on interest rates how would you want to change the duration of your portfolio? Provide an explanation to support your decision on how to change your portfolio.
3-, 5- and 10-year CGS Bond futures are available to trade via the ASX (https://www2.asx.com.au/markets/trade-our-derivatives-market/overview/interest-rate-derivatives/bond-derivatives)
Features of these contracts are as follows:
10 year contract: $100000 Face Value, 6%p.a. semi-annual coupon and current YTM of 1.72%p.a.
5 year contract: $100000 Face Value, 2%p.a. semi-annual coupon and current YTM of 1.35%p.a.
3 year contract: $100000 Face Value, 6%p.a. semi-annual coupon and current YTM of 1.15%p.a.
Outline a strategy using one or more of these contracts to achieve the desired duration position for your portfolio. You will need to find an approximate dollar value of exposure you need to buy or sell in the futures to achieve your desired duration.
Describe what risks you face from your strategy.