So to hedge the bond, using futures - the denominator should include futures price, not CTD price, so if price of CTD is given we divide it by CF to find futures price (or if $D of CTD is given), if we already have futures price and the duration (which is same for CTD and futures) we dont use CF. (so we dont keep multiplying by CF to find price of CTD and then divide back by CF to find $D of futures like Schweser does!) - when the questions ask to hedge for i.e 80 basis points cgange in interest rates, we can ignore it coz if you hedge for 100 bp, it means it’s hedged for 80 too. (.0080 appears both in num and denom so cancels out) (so we dont include it as Schweser does) is that correct?
confused now!! in sample#1 the answer divides the futures contract price by CF. in the denominator. so if price CTD= futures price x CF in what logic would you divide futures price by CF?
Are you sure? I think the correct possibilities are: Nf = [(Dt-Dp)/Df] * (Vp/Pf*q) *beta or Nf = [(DDt-DDp)/DDf] *beta Nf = [(Dt-Dp)/(Dctd/CF) *(Vp/Pf*q] *beta or [ (DDt-DDp)/(DDctd/CF) * beta Correct me if I am wrong
Thats what I think. in fact all formulas are the same you can link them with DD=MV x D and Pf=ctd/CF BUT I am sure in sample 1, CFAI divided futures price by CF if I remember correct the question said “the contract price of the futures…” maybe they meant the underlying bond?
a huge amount has been posted on this…with little in the way of resolution. search “CTD”