Question 3 asks for the number of futures contracts Austin needs to sell to eliminate all interest rate risk in the portfolio.
It uses $1 billion as the value of the portfolio and Pcd (96,500) and CTD conversion factor (1.17) for the formula. Also, it lists the futures price of 100,000.
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Why we don’t need to use $1.25 billion as the value of the portfolio since we are borrowing another 25%?
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Why can’t we use the futures price directly $100,000? (answer uses 96,500 and 1.17 and 96,500/1.17 which is not equal to $100,000)
Thank you!