Solution-How many futures contracts do you need to sell

How many futures contracts do you need to sell

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Reference no: EM132731562

You are managing a pension fund holding $50 million of five-year bonds with 6%-coupon rate. The bonds in the portfolio are selling at par. Underlying bonds in the futures contract are 5-year T-bonds with 3% coupon rate, and the size of the contract is $100,000. Yield to maturity (YTM) for the T-bonds is 4%, and thus, the bond portfolio in the fund have 2% risk premium, i.e., 6% - 4%. For a given change in the interest rate by 1%, both yields for the T-bonds and for the fund bonds change by 1%, and thus, maintaining 2% risk premium.

How many futures contracts do you need to sell to hedge the fund value?

Reference no: EM132731562

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How many futures contracts do you need to sell

Reference no: EM132731562

Reference no: EM132731562

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