A $500 million bond portfolio currently has a modified duration of 12.5 years. The portfolio manager wishes to reduce the modified duration to 8.0 by using a futures contract priced at $105,250. The futures contract has an implied modified duration of 9.25. The portfolio manager has estimated that the yield on the bond portfolio is about 8% more volatile than the implied yield on the futures contract. A. Indicate whether the portfolio manager should enter a short or long futures position. B. Calculate the number of contracts needed to change the duration of the bond portfolio. C. Assume that on the horizon date, the yield on the bond portfolio has declined by 50 basis points and the portfolio value has increased by $31,343,750. The implied yield on futures has decreased by 46 basis points, and the futures contract is priced at $109,742. Calculate the overall gain on the position, bond & futures. Determine the ex-post duration with and without the futures transaction.
A $500 million bond portfolio currently has a modified duration of 12.5 years. The portfolio manager wishes to reduce the modified duration to 8.0 by using a futures contract priced at $105,250. The futures contract has an implied modified duration of 9.25. The portfolio manager has estimated that the yield on the bond portfolio is about 8% more volatile than the implied yield on the futures contract. A. Indicate whether the portfolio manager should enter a short or long futures position. B. Calculate the number of contracts needed to change the duration of the bond portfolio. C. Assume that on the horizon date, the yield on the bond portfolio has declined by 50 basis points and the portfolio value has increased by $31,343,750. The implied yield on futures has decreased by 46 basis points, and the futures contract is priced at $109,742. Calculate the overall gain on the position, bond & futures. Determine the ex-post duration with and without the futures transaction.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education