Duration management?

Need to get something straight. Hedging interest rate risk, you buy/sell futures to hedge the impact of rate changes. An example says that a portfolio has a DD of $32,000 and you want it to be $20,000, and you solve for the # of contracts to achieve this. The resulting $20,000 DD of an effective hedge simply means that for a 100bps change in rates, your DD will be $20,000, right? Does this mean that the the dollar change won’t exceed $20,000?

Not sure I understand how this locks in the DD at $20,000, what if rates change more than 100bps, won’t the change be greater or less than $20,000?

Thanks for any help!

DD is not equivalent to a perfect hedge . It only attempts to match a required level of risk. as such is defined as the change in portfolio value for a 1% or 100bps rate change . Of course the portfolio will lose more for larger rate changes or gain for lesser rate changes.

Usually there is a liability also which depends on rates. If that has some level of duration you want o simply match it or stay within shouting distance of it

Ok. That makes sense. At first pass, I got the sense that simply limiting the DD to a specific level, that somehow it meant that that was the most it could lose ($20,000 in first post) - but that’s not the case. It’s merely for matching the DD against something else ( a liability for instance). That correct?

And in order to limit the DD to $0 - that is, no risk of losing anything - target would be = 0?

So one fixes DD at a certain amount while the latter ensures no losses at all, that right?

Thanks for the help!

you got it

So does managing the DD through fwd contract hedging (I.e. attempting to match or limit duration) serve conceptually the same purpose as rebalancing (through rebalancing ratio)? That is, to adjust the duration back to desired levels?

without the higher cost involved… since it is a futures contract that is used