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. edegroote New 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
    edegroote, Sep 21, 2012
    #1

  2. David Harper, CFA, FRM, CIPM David 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,
    David Harper, CFA, FRM, CIPM, Sep 21, 2012
    #2

  3. edegroote New Member

    thank you, that explains it well.

    Evelyne
    edegroote, Sep 22, 2012
    #3
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