Schweser book 1 - Exam 1 - PM session Q 38

so they say they want to edge a 125 days investment and they can enter in a 90day future or 180 days future. they want to minimize basis risk.

  1. roll the 90 day in another 90 day

  2. buy the 180

3.coutinually adjust the hedge until the futures maturity equals the disered holding period.

the answer they give is 3.

What is up with that? Future are standardized contract. you can roll the front month but their is no such thing as a future that will end perfectly at the 125 days contract day. I mean if it was forward I would assume it would have been possible, but with future, can someone tell me how you can fit a 125 day investment with a 90day contract or a 180 day contract.

I guess you can use two futures surrounding the maturity so that the wavg maturity of the futures is the maturity of the investment. but yah I agree, not very clear to me

thanks for feeling it with me!

na this would not eliminate the basis risk. I still hate this question. :frowning: