I am having trouble understanding this one… it is asking how many contracts to purchase to change the allocation in the portfolio, which is fine and I understand completely…however when calculating the number of contracts they use Duration of Bonds - Expiration of .25 years and then divide by the duration of the futures contact… my question is what exactly is this .25 they are subtracting… I dont remember seeing this in Schweser at all, which most likely is why I don’t understand it, but can someone explain what that .25 is?
This one was super tricky. Going back through the records I see very few people go this right. You use 0.25 as the portfolio duration because that is the duration of the US Treasury Bill (cash equivalent contract). See the first step was to reduce the equity allocation by converting it to cash (which we were not asked to calculate). The next step (which we are asked to calculate) is how many bond futures to purchase. The duration of the cash position which we convert into bonds is 0.25 (which is provided to us). So it is ($160m/$110,000)*(5.9 - 0.25)/6.5
Thanks a lot newsuper… certainly agree that it is a tricky question… I get it now when you look at it from the perspective of first having to convert to cash and THEN having to go to bonds… I just assumed starting from regular cash with duration of 0 and increasing to the target… so frustrating when you know you understand topics and then they throw something like this in there… but at least I see it now for the first time and not on test day…