I’m obviously not getting this whole CTD thing Question: $450m long portfolio of fixed income, required to hedge away interest rate risk using a future: Treasury future: Price = $112,350, duration = 6.5 CTD conversion factor = 0.9233. The yield beta is 1.09 My answer: Hedge required = DDportfolio / DDfuture = DDportfolio / (DD ctd / conversion factor) * yield beta But we dont have DDctd here, so how do ppl answer this (my answer was wrong)
umm yes you do DDctd = 6.5. Check CFAI book examples. whenever they mention t futures and duration it means DDctd duration
Isn’t the CTD price supposed to be in there somewhere?
112,350 IS CTD price
The exact sentence in the question is “…has found that a Treasury futures contract with a duration of 6.5 is priced at $112,350. The conversion factor for the CTD bond is 0.9233, and the yield beta is 1.09”
and…? check the example in the book, you will understand
is this the last one of schweser exam 3, vol1?
I believe CFAI is wrong in that… It probably means “price of CTD” instead of “price of futures contract” in the question.
Hala, yes the question you refer to is schweser exam 3 volume 1 Q18.4. The question above is from sample 1, CFAI online. Same topic. FWIW the schweser question you refer to is: Treasury bond priced at 108,500 CTD bond conversion factor 1.259, and a duration of 10.15 (ie they give the duration of the CTD not the treasury bond being used in the hedge)
ok, i think the problem here is that we all overthink because of what schweser did: This is what schweser did: + they give you the price of the future, but the duration of the ctd + the only way to get DD of the ctd is if you know the price of the ctd (not the futures) + schweser comes up with the idea that it is = to price of the FUTURE x F x duration of teh ctd But if you go to cfa book, the example for this is the same: + they give you the price of the future + they give you the duration + magic: they understand that both the price of the future and the duration are for the CTD + so they calculate DD of the ctd, and then use F to end the formula (out of the denominator) i would not complicate myself: every number they give me, i will assume is both price and duration of the ctd, and I will have use “out of the denominator” both F and yield beta
where exactly is the example located?
at the begining, just when introducing the concept and you have end of chapter number 2: the same, again, they give you price of the future, and duration of the future, and automatically they understand is duration of ctd, price of ctd, and you use F
so, so much has been written about this already with not much of a resolution. search “ctd” and you’ll seem some on-topic posts. short answer is that for saturday, if cfai says there is a treasury “futures contract priced at $xx”, $xx is the price of the CTD. period. it’s stupid and imho wrong, but that’s the way they do it. see reading 29 example 11 and the related end-of-chapter probem (#2 i believe).