Adjust duration through treasury bond futures

CFA Level III
#1

I’m a bit confused about a question on practice problems.

we need to reduce the exposure to bond markets by reducing the amount of 100 exposure.

the bond portfolio’s duration is 6, and the tresury bond futures’s duration is 2 with the price of 10.

It is also given that the duration of cash equivalent and any hedged position is 1.

So the No. of futures to be sold = (1-6)/2 * (100/10) =25.

Why we need to use the duration of cash equivalent and any hedged position in the formula?

#2

It sounds as though the question is poorly worded. Apparently they want you to replace your exposure to bonds with an exposure to cash; hence, you use the duration of cash as your target.

#3

I thought the duration of cash is 0.

#4

The duration of cash is whatever they tell you it is in the question you’re answering.

#5

Thanks Magician. I also had the same issue with this very question.

#6

You’re welcome.