- Question 16 from the Kaplan afternoon Live mock.
Answer states "At any given time (including at contract initiation) identifying the CTD can be determined through a mechanical process. There is no uncertainty in the process at any one moment in time. The CTD is whatever bond would at that moment be expected to generate maximum profit for the contract seller (i.e., the delivery option). (Note that changes in the CTD during the contract’s life are unpredictable and are a source of hedging risk.) "
Answer states CTD statement (identifying the CTD bond at the initiation of the hedge)" is least likely a concern… The first part of the answer makes sense, then it mentions “changed in the CTD are unpredictable and are a source of hedging risk.” If it is a hedging risk, shouldn’t it be a concern as well?
2. Statement 1 "forecasting the basis at the time the hedge is lifed"
Answer states it is an issue when the hedge is lifted early or there is a cross hedge because the futures price is not equal to the spot price like it does at expiration. Does it mean the Dctd*Pctd/CTD conversion factor (futures prices) will not be the same as hedging instrument price when the hedge is lifted early?
- The hedge ratio formula: Dp*Pp/(Dctd*Pctd/CTD converstion factor) *yield beta. I don’t remember seeing a question using this formula. Maybe I forgot. So, is this something we need to remember?