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Derivative Strategies

Why long position in Bond Futures increases duration?

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Not necessarily. Long position in bond futures will either decrease or increase overall portfolio duration. It depends on 1) duration of futures (let’s denote A), 2) duration of portfolio before adding futures (let’s denote B). If A > B, then overall portfolio duration will increase, if A<B, then vice versa.

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ok

thinkwiseandact wrote:
Not necessarily. Long position in bond futures will either decrease or increase overall portfolio duration. It depends on 1) duration of futures (let’s denote A), 2) duration of portfolio before adding futures (let’s denote B). If A > B, then overall portfolio duration will increase, if A<B, then vice versa

With all due respect, you’re completely wrong here.

A long position in bond futures will, necessarily, increase a portfolio’s overall duration.

A long position in bond futures means that you have, essentially, already purchased the bonds, so the money duration of the futures is added to the money duration of the existing portfolio.  But, because you haven’t paid anything for the futures, the money value of the portfolio hasn’t changed.  A higher money duration divided by an unchanged portfolio value results in a longer duration.

Necessarily.

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Well, appreciate your comment here.

https://www.theice.com/publicdocs/futures/Managing_Bond_Portfolio.pdf

Here we have Scenario 1, in which case investor buys futures and says decreases duration. Are they wrong or do I miss something?

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thinkwiseandact wrote:
Well, appreciate your comment here.

https://www.theice.com/publicdocs/futures/Managing_Bond_Portfolio.pdf

Here we have Scenario 1, in which case investor buys futures and says decreases duration. Are they wrong or do I miss something?

In their calculation, they include the price of their futures contract in the denominator.  Therefore, it sounds as though you have to pay cash today for the full value of their futures contract.

Humbly: if that’s the case then it’s not a real futures contract.  If it’s not the case, then their calculation is wrong.

In a real futures contract, your upfront cost is zero.

You should know this from your study of Level III derivatives.  If you want to increase the duration of a fixed income portfolio you buy (i.e., take the long position in) bond futures contracts, and if you want to decrease the duration of a fixed income portfolio you sell (i.e., take the short position in) bond futures contracts.  Whether the duration of those contracts is longer or shorter than the duration of your existing bond portfolio doesn’t change that fact.

By the way: I notice that the copyright on that page is 2014.  Do these even still exist?

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

gargijain, Sorry for misleading. Seems magician’s explanation answers to your question.

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S2000magician wrote:

In their calculation, they include the price of their futures contract in the denominator.  Therefore, it sounds as though you have to pay cash today for the full value of their futures contract.

Humbly: if that’s the case then it’s not a real futures contract.  If it’s not the case, then their calculation is wrong.

In a real futures contract, your upfront cost is zero.

You should know this from your study of Level III derivatives.  If you want to increase the duration of a fixed income portfolio you buy (i.e., take the long position in) bond futures contracts, and if you want to decrease the duration of a fixed income portfolio you sell (i.e., take the short position in) bond futures contracts.  Whether the duration of those contracts is longer or shorter than the duration of your existing bond portfolio doesn’t change that fact.

By the way: I notice that the copyright on that page is 2014.  Do these even still exist?

Now I see. Yeah, I should have already known this… my mistake.

S2000magician wrote:

By the way: I notice that the copyright on that page is 2014.  Do these even still exist?

I think so. Their stock is trading in NYSE. Why won’t they exist?

Think wise and act!

thinkwiseandact wrote:
S2000magician wrote:
In their calculation, they include the price of their futures contract in the denominator.  Therefore, it sounds as though you have to pay cash today for the full value of their futures contract.

Humbly: if that’s the case then it’s not a real futures contract.  If it’s not the case, then their calculation is wrong.

In a real futures contract, your upfront cost is zero.

You should know this from your study of Level III derivatives.  If you want to increase the duration of a fixed income portfolio you buy (i.e., take the long position in) bond futures contracts, and if you want to decrease the duration of a fixed income portfolio you sell (i.e., take the short position in) bond futures contracts.  Whether the duration of those contracts is longer or shorter than the duration of your existing bond portfolio doesn’t change that fact.

By the way: I notice that the copyright on that page is 2014.  Do these even still exist?

Now I see. Yeah, I should have already known this… my mistake.

S2000magician wrote:
By the way: I notice that the copyright on that page is 2014.  Do these even still exist?

I think so. Their stock is trading in NYSE. Why won’t they exist?

Only because their copyright is 5 years old.  If they haven’t updated their website in 5 years, that might be an indication that they’re no longer doing business.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Thanks Magician!!!

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/