# Duration and futures contracts

Bond A, Price = 95, Duration = 4.5 If interest rates increase by 100 bp, calculate the dollar duration of bond A and determine what should be done to increase the dollar duration of the bond. So the answer is: 1. dollar duration = 95 * 4.5 * 0.01 = \$4.28 (which I get) 2. To increase the dollar duration, you should buy futures contracts (what is the rational behind this?! And what futures contracts would you buy?!) Thanks in advance. (This question is from Schweser, Book 3, p 179, Q3)

Bond futures.

In my opinion, that’s a poorly worded question. We are not increasing duration of the bond but that of the portfolio.

I am holding Book 3 in my hand. If investor wanna increase DD, she/he needs to buy futures to increase duration of his/her portfolio. Just think about the equation: futures contract = (Target Duration - current duration) / DD of futures. Now, investor needs a target duration higher than the current, so (Target Duration - current duration)>0. ">0 " means “long”.

lillilland Wrote: ------------------------------------------------------- > Bond A, Price = 95, Duration = 4.5 > > If interest rates increase by 100 bp, calculate > the dollar duration of bond A and determine what > should be done to increase the dollar duration of > the bond. > > So the answer is: > 1. dollar duration = 95 * 4.5 * 0.01 = \$4.28 > (which I get) > 2. To increase the dollar duration, you should buy > futures contracts (what is the rational behind > this?! And what futures contracts would you > buy?!) > > Thanks in advance. > > (This question is from Schweser, Book 3, p 179, > Q3) Bond futures has duration, so if you want to increase duration (or DD), you should buy it. Analogy: Orange contains lots of vitamin C, if you want to get a Vitamin C, eat more oranges. Of course you could just buy Vitamin C directly (i.e., you could simply buy bonds directly instead of futures), but in that particular section, we’re dealing with futures contract.