Quick question on this formula: Appropriate number of contracts= = (Dt-D1)*P1*Conversion factor for the CTD bond* yield beta Dctd*Pctd where: Dt= Target duration for the portfolio D1= initial duration for the portfolio P1= initial market value of the portfolio Dctd= the duration of the cheapest to deliver bond Pctd= the price of the cheapest to deliver bond Sorry this didn’t paste so great, but I think most of you will be familiar with this formula. I just wanted to verify a few things: 1) Conversion factor for the CTD bond: The conversion factor is included because the CTD bond may have a yield that is more or less volatile than the futures contract. If the CTD bond has a yield that is more volatile than the futures contract, the conversion factor will be less than one, if it is less volatile than the futures contract, the conversion factor will be greater than one. Is this correct? 2) Yield beta: If we aren’t given the yield beta, we are to assume that it is 1, correct? Also, with regards to the yield beta, if the yield on the bond portfolio is more volatile than the yield on the futures that the yield beta will be greater than one. It this correct? Thanks for your help.
bump
- There is a conversion factor b/c there isn’t always a nice 30 year 6% t-bond to buy, so hence you can purchase a bond within the guidelines, i think greater than 15 or 20 years, 6% yield maybe, and then you find the cheapest to deliver and you use the conversion factor to factor it to a 30Y 6%… That is what I recall, but dont’ hold me to it I still have a lot of reviewing todo. 2)Yes assuem 1 unless given.