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
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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.
Transcribed Image Text: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.
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