quiz2 - and the standard deviation of the T-bond futures...

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Name Quiz 2 1. A bond fund will be winding down in 6 months. Its portfolio consists mostly of long-term Treasury bonds with a total face value of $150 million. Its manager decides to hedge the portfolio risk using Treasury bond futures. Because the bond fund portfolio contains T-bonds that may di/er in maturity and coupon from the T-bonds underlying the T-bond futures contract, the hedging is imperfect and one needs to compute the optimal hedge ratio. It is estimated that over a 6-month period, the change in the bond fund value and the change in this particular T-bond futures price have a correlation of 0.85. Furthermore, the standard deviation of the value of the fund is $900 (per $100,000 face value)
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Unformatted text preview: and the standard deviation of the T-bond futures price (per $100,000 face value) is $850. a) Should the manager take a long or a short futures position? The manager anticipates selling the portfolio in the future. So he should short futures as a hedge. b) One T-bond futures contract is for the delivery of $100,000 face value of the underlying T-bond. How many contracts should the manager use? The optimal hedge ratio is : 85 & 900 = 850 = 0 : 90 . The number of contracts needed is : 9 & 150 ; 000 ; 000 = 100 ; 000 = 1 ; 350 : 1...
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This note was uploaded on 03/19/2008 for the course FI 478 taught by Professor Yu during the Spring '08 term at Michigan State University.

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