Topics Test - Laredo (Fixed Income)

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.

  1. Why we don’t need to use $1.25 billion as the value of the portfolio since we are borrowing another 25%?

  2. 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!

  1. Use CTD price when is given for bond FUT contracts as well as conversion factor.

  2. Portfolio (Fund) value must be 1B as stated in the first sentence. 1.25B (with 25 % borrowings) must be just hypothetically related to one of prior questions.

I see. Thanks for the help, Flashback!

Do you know the reason for that? is it because CTD price is more accurate?

There is some explanation in Schweser with CBOT FUT pricing and also is related to conversion factor and yield beta but I cannot remember and am lazy to look for it now, it’s late here.