Institute book, volume 4, SS 10, Reading 31, p.109 Example 11. I dont understand why we multiply by 1.1 (the conversion factor) when the duration of the futures contract is given and used (as opposed to the duration of the CTD) Is this a mistake? Any help greatly appreciated
Check the errata: An expanded definition of DCTD would be the duration of the cheapest-to-deliver-bond to satisfy the futures contract. For Reading 31, whenever phrasing similar to the following is used ‘a futures contract priced at Y with a duration of X’, what X actually represents is the duration of the cheapest-to-deliver-bond to satisfy the futures contract.
Thanks! This had been confusing me. I suspect, in the exam, if we see a conversion factor, we would be expected to use it. I would be suprised if the question gave you the futures duration AND a conversion factor (as a sort of ‘red herring’) which you are supposed to ignore.
So, what is your conclusion ? What is the case that the conversion factor shall be multiplied ? What is the case that the conversion factor shall not be multiplied ? And yield beta is irrelevant ?
Unless I’m misinterpreting the errata: what they actually give you in the question is the duration of the CTD, not the duration of the futures contract, therefore the use of the conversion factor is in fact nescescary.
That makes sense.
So conversion factor takes you from ctd to forward rather than forward to ctd. Just to be very sure I have it.
So, Dctd / CF = Dfutures ? Yield beta is irrelevant ? On P.112 of Text Vol 4, Yield Beta must be multiplied. But no Yield Beta is provided and multiplied in Example 11 on P.109. Why ? Your confirmation is appreciated !
CFAI RESPONSE: Yield Beta Question Posted by: fotis21r (IP Logged) [hide posts from this user] Date: May 28, 2009 07:51AM So they got back to me today: “The vignette is being updated and the yield beta is being changed to 1.00. Also, the futures contract being used is the CTD bond. Yes, if you are given the yield beta of the bond to be hedged, you should multiply the hedge ratio by the yield beta” makes sense if the bond you’re hedging was the CTD yield beta is 1 and it was a typo. hope you’ll can sleep easy now! best, Frank
bdeora, Would you please kindly confirm if you are referring to the Example 11 on P.109 of Text Vol 4 ? TKVM !