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What is the price of the cheapest to deliver bond

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Reference no: EM133111934

You wish to use a Treasury bond futures contract to hedge a bond portfolio over the next 6 months. The portfolio is worth $100 million and has have a duration of 5 years. The futures price is 105, and each futures contract is on $100,000 of bonds. The bond that is expected to be cheapest is a 2.5% coupon 2-year bond. Coupons are paid semi-annually. The term structure of interest rates is currently flat at 2% per annum.

a. What is the price of the cheapest to deliver bond?

b. What is its duration?

c. What position in futures contracts is required to hedge your portfolio?

Reference no: EM133111934

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