Tough Duration Hedging Question Schweser V1E3PM Q 52


Smiler will issue $25m of 20 year par debt in 9 months. Ng is concerned that i rates can fluctuate and wants to hedge the i rate risk by using T bond futures. Fut price is $75,287 with a dur of 7.11. Ng has also run a regression of yields on 20 year corp bonds comparable to this new issue vs T bonds and finds a stable regression of 1.05.

How many futures contracts need to be transacted to hedge.

Answer below…

Stop peeking…

(0 - 9.9)/7.11 * 25m/75,287 * 1.05 = 485.48

My quesiton is where in the h*** does 9.9 as a corp bond duration come from? There really is no more info in the passage. Is this simply a typo and Schweser has forgotten to put the main bond duration in the question??

Yepp, I had this query a month back asking the same

If you see the errata they have forgotten to add the duration of 9.9 in the text

What is the 1.05 in the formula from the regression? Is this the yield beta?


Good to know, mistake on their part then, guess im not going crazy