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Unformatted text preview: minimize the variance of a portfolio of bonds and futures. We want to set the duration of the hedged portfolio equal to zero. Duration and hedging 4 y D B B = DurationBased Hedge Ratio (N*) VF Contract Price for Interest Rate Futures DF Duration of Asset Underlying Futures at Maturity P Value of portfolio being Hedged DP Duration of Portfolio at Hedge Maturity 5 F F P D V PD Example: Text Problem 6.17 Two month hedge is required for a $10 million portfolio. Duration of the portfolio in 2 months will be 7.1 years. 2month Tbond futures price is 9112 so that contract price is $91.375.99. Duration of cheapest to deliver bond in 2 months is 8.8 years. The manager should short 88 contracts. 6 30 . 88 8 . 8 00 . 375 , 91 1 . 7 000 , 000 , 10 =...
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 Spring '12
 LucyAckert
 Debt

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