Assuming we need to fully hedge, how can we do so by using the formula in derivatives [(MD target - MD portfolio)/MD swap] x MV of portfolio?

Target duration is zero.

Could you please guide me where did I go wrong below?

Currently the portfolio is over hedged (based on MD), so applying the formula,

[(0 - 16.4)/17.51] x 289m = -270m notional principle

But, the answer in the example states 392 millionâ€¦

BPV of liabilities is USD1.215M

BPV of assets is USD 528k

BPV of (assets less liabilities) is -USD687k

BPV of swap is 0.1751/USD100 of notional principal

so need 687/1.751=392k of notional principal

Same answer using duration:

Liabilities 1.321*9.2= 12.1532

Fixed Income 1.032 * 0.20 * 25.6= 5.28384

subtract these

12.1532-5.28384= 6.86936

divide by effective duration of swap

6.86936/17.51=0.392

how did you get 1.751? shouldnâ€™t it be 0.001751? Also, the answer is 392 million

Thereâ€™s a whole bunch of typos in there because I did it at high speed.

The important thing is you now know how to do the question.

thank you!

I have a question in this formula, can we solve it using this formula instead

[(MD target - MD portfolio) / MD swap] x MV of portfolio?

How do we get the MV of portfolio here?