# Markets&Pr​oducts; notes p64 -calculation duration-based hedge ratio

Discussion in 'P1.T3. Financial Markets & Products (30%)' started by edegroote, Sep 21, 2012.

1. ### edegrooteNew Member

Dear David,

I am contacting you as i am not able to follow a seemingly easy example of calculating a duration-based hedge ratio.
in the example on p64, the Fc is stated as 98´000
how is this obtained?
the underlying T bond has a face value of $100 000, and the future price is$ 98
thanks a lot for a short feedback as i am really stuck with this one.
good evening,
Evelyne
2. ### David Harper, CFA, FRM, CIPMDavid Harper

Hi Evelyne,

For US Treasury bonds, the quoted price is for a T-bond with a face value of $100 and the T-bond futures contract (i.e., the derivative), by function of mere specification (to standardize the commodity), is: "Underlying Unit: One U.S. Treasury bond having a face value at maturity of$100,000."

Consequently, the T-bond futures contract price = [T-bond quote price]/100 * $100,000; or, we can think of as: [T-bond quote price] per$100 face * $100,000 In the example, F(c) = 98/100 *$100,000 = \$98,000

fwiw, we just published Focus Review P1.F4 and I included GARP's [practice exam] question 2012.P1.22, which quizzes the same idea:
Notice that GARP inserts the two red herrings of current portfolio duration and current CTD duration, which are not used!

I hope that is helpful, thanks,
3. ### edegrooteNew Member

thank you, that explains it well.

Evelyne
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