B_C, I think I speak for everyone when I say we’d like the answer.
mib20 Wrote: ------------------------------------------------------- > Assuming the mult is 1000, which would be standard > for a T-bond future, skill should be correct with > the equation, but I got a different answer than > his… > > ((0-15.5)/(10.68/1.082))*(52,871,500/96,500) = > -861 contracts My questions are: 1. Why do you assume that the target duration is 0? 2. Why do you say that the initial duration of the bond is 15.5. The problem states that “at the end of the hedge horizon” the duration of the corporate bond will be 15.5 3. Same question as 2. but with future’s duration…
Here is the answer ((0-15.5)/(10.68/1.082))*((99.332*0.55M)/(104.413*1K))= 822 Remember to use CTD DUR, CF and CTD price
3 questions : 1. Is the “60 basis point change in yield” is irrelevant ? 2. What it will be “for 100 basis point change” in yield using the CTD for a 60 basis point change in yield ? 3. Why the multiplier is 1000 ? How can we know ?
- 60 bps is canceled out because both denominator and nominator have 0.006 (-15.5*0.006*99.337*0.55M)/((10.08/1.082)*0.006*104.413*1K) 2) see above 3) I guess on the exam they will provide, but my instructor say, if it is not provided use 1000. This is the standard i guess.
B_C, My 2nd question : What it will be “FOR 100 BASIS POINT CHANGE” in yield using the CTD for a “60 BASIS POINT change in yield” ? I am much confused by this because it seems that Schweser’s definition of DOLLAR DURATION is different from CFAI’s definition.
same result as 60 bp because $DURp/$DURF =>bp on denominator and nominator cancelled out each other
sorry I misread your question If -MV*DURp*0.01/P*DURF*0.01=> you can just ignore the bp If this is -MV*DURp*0.01/P*DURF*0.006 => you probably need to adjust it by 0.01/0.006
$DUR used by CFAI is DUR*MV*0.01 $DUR used by Schewser: DUR*MV*yield change. Actually they are the same. 0.01 is the standard. But the question can set for any yield change.
B_C Wrote: ------------------------------------------------------- > If this is -MV*DURp*0.01/P*DURF*0.006 => you > probably need to adjust it by 0.01/0.006 This is my question point !
where is this Q from ? Qbank, or CFAI text?
From the course material of schweser. I took their revision course.
I have no idea about the formula’s since I always skip the derivatives section but this is what I did: Calculate Dollar duration per bond/future. Gives 9.24 and 6.7. The 6.7 of the future has to be divided by the contract factor. Then the 55 million * Duration of Bond divided by 100 is the duration of the bond. This has to be divided by duration of Future and I get 821.6. Think that is easier to understand than a formula. Calculate Dollar Durations, calculate Dollar duration of entire position and divide that by the dollar duration of the hedge. Et voila.
why don’t we use $96.13 to multiply with 55? Isn’t that the value we have currently with us?
B_C Wrote: ------------------------------------------------------- > From the course material of schweser. I took their > revision course. which page, which set exam? I will ask schweser instructor this afternoon about this Q.
P.71 on their revision course, question and answer pack.
Agree - why 't we used the actual price of the corp bond rather than the futures price? and why have we used the futures price of the CTD rather than the price of the futures contract in the denominator of the final part - i.e. to give the equation: [MDt-MDb/(MD(ctd)/Conv factor)] x Current value of Bond portfolio/(Pf x multiplier)
To convert CTD to future. we need $DUR(CTD), because… $DUR(future) = $DUR(CTD)/CF To get $DUR(CTD), we need the price of CTD, not price of future because… $DUR(CTD) = P(CTD)*DUR(CTD)*yield change. ($DUR = dollar DUR)
that’s fine for the $D of the futures but what about $D of the equity position - not sre if i’m just misreading your question as you seem to have 2 prices for the corp bond - $96.13 and $104.413?
The question really has 2 prices for corp bond - $96.13 and $104.413, not a mistype.