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Formulate klein hedging strategy

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Reference no: EM132764419

Question - June Klein, CFA, manages a $100 million (market value) U.S. government bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the portfolio against any such change.

Portfolio and Treasury Bond Futures Contract Characteristics

Security Portfolio

U.S. Treasury bond futures contract

Modified Duration

10 years 8 years

Basis Point Value

Conversion Factor for Cheapest to Deliver Bond

$100,000.00 Not Applicable $75.32

1 Portfolio Value/ Future Contract Price

$100,000,000 94-05

a. Discuss two reasons for using futures rather than selling bonds to hedge a bond port-folio. No calculations required.

b. Formulate Klein's hedging strategy using only the futures contract shown. Calculate the number of futures contracts to implement the strategy. Show all calculations

c. Determine how each of the following would change in value if interest rates increase by 10 basis points as anticipated. Show all calculations.

(1) The original portfolio

(2) The Treasury bond futures position

(3) The newly hedged portfolio

d. State three reasons Klein's hedging strategy might not fully protect the portfolio against interest rate risk.

Reference no: EM132764419

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