Sign up  |  Log in

Effect of rate change on performance of a bond hedge: Difficult question

Lets say I have a bond portfolio that i have hedged by shorting a certain number of futures.

In case all rates increase over 3 months, but short term rates increase less than the medium term rates and medium term rates increase less than long term rates. 

What effect will this have on the hedge??

Regards

Personalized CFA® exam prep is here! Through this exclusive Analyst Forum offer, you can save 10% on a June 2020 Level III CFA PremiumPlus™ or Premium Study Package. Use promo code KS-AF10 at check out. Offer expires Oct 31, 2019.

It depends on the distribution of durations in your portfolio, and the duration of the futures contracts you used for the hedge.

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/

S2000magician wrote:

It depends on the distribution of durations in your portfolio, and the duration of the futures contracts you used for the hedge.

I would love to read your answer in greater detail :)

freekyguy008 wrote:

Lets say I have a bond portfolio that i have hedged by shorting a certain number of futures.

In case all rates increase over 3 months, but short term rates increase less than the medium term rates and medium term rates increase less than long term rates. 

What effect will this have on the hedge??

Regards

Sounds like you have a bear-steepener - if your futures represent a short-bullet portfolio, your hedge should outperform relative to your portfolio ie the increase in your futures value > decrease in your portfolio