Just gave Kaplan mock exam, one of the questions required us to calculate number of future contracts to adjust duration of the fixed income portfolio. I know the forumula and then we multiply with conversion factor, but the solution to this problem also mutiplied the answer with yield beta vs future actor.
Can someone explain me that what is yield beta vs futures factor?
cpk123
May 23, 2016, 11:33am
#2
all explained in the book … (but in an section marked optional)
Suppose, for example, the rate driving all rates in the United States is the overnight Fed funds rate.9 If this rate changes by 1 basis point, not all rates along the term structure are likely to change by 1 basis point. What actually matters, however, is not that all rates change by the same amount but that the yield on the bond portfolio and the implied yield on the futures change by the same amount for a 1 basis point change in this rate. If that is not the case, we need to make an adjustment. Suppose the yield on the bond portfolio changes by a multiple of the implied yield on the futures in the following manner: ΔyB = βyΔyf We refer to the symbol βy as the yield beta. It can be more or less than 1, depending on whether the bond yield is more sensitive or less sensitive than the implied futures yield.
If we take the formula we previously obtained for ΔB, substitute βyΔyf where we previously had ΔyB, and use this new variation of the formula in the formula Nf = –ΔB/Δf, we obtain Nf =−(MDURB MDURf)(Bf)βy"
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