Hi, Level 3 candidates, Do you think that the portions of P.106~115 of text Vol 4 (I/R Futures, Options & Swaps) are similar to the contents in Reading 42~44 but some sayings seem to be inconsistent ? The fomulae seem to be different ! Specifically, 1. The formula on P.109 of Vol 4 for the “Approximate number of (futures) contracts” is something different from that in Reading 42. 2. Do the formula on P.111 and P.112 for the “Hedge Ratio” mean the “Target (dollar) duration” is 0 ? Put another way, does “Hedge” here means to decrease the (dollar) duration to 0 ? Your advice is appreciated !
AMC Wrote: ------------------------------------------------------- > Hi, Level 3 candidates, > > Do you think that the portions of P.106~115 of > text Vol 4 (I/R Futures, Options & Swaps) are > similar to the contents in Reading 42~44 but some > sayings seem to be inconsistent ? > The fomulae seem to be different ! > > Specifically, > > 1. The formula on P.109 of Vol 4 for the > “Approximate number of (futures) contracts” is > something different from that in Reading 42. This is different from the other reading because you can use several different underlying bonds to deliver on the future. Because each bond has a slightly different duration you have to add the “conversion factor” term to the equation. With the future in later readings the underlying is known (and so is the underlying’s duration). > > 2. Do the formula on P.111 and P.112 for the > “Hedge Ratio” mean the “Target (dollar) > duration” is 0 ? Put another way, does “Hedge” > here means to decrease the (dollar) > duration to 0 ? This hedge ratio just means that if you are trying to use a t-bond to hedge against some other bond, they may not move the same amounts (not be a perfect hedge). So you have to adjust your hedge up or down to create your “optimal” hedge. In effect an adjustment for basis risk. > > Your advice is appreciated ! Hope this helps.
mwvt9, Thank you for your feedback ! Do you mean that only t-bond can be used to hedge against some other bond and many kinds of bond (both corporate and treasury) can be used to alter the (dollar) duration of the bond under consideration ? On the other hand, does “hedge” means to reduce the (dollar) duration to 0 ?