# Yield Beta - CFAI Level 3 mock

Hi Guys, Can someone exlpain why Yield Beta is not used to adjust the number of contracts in question Groton has identified a U.S. Treasury futures contract with a duration of 6.5 priced at \$110,425. The conversion factor for the CTD bond is 0.9177 and the yield beta is 1.12. Groton tells the committee that the yield beta captures the relation between the CTD bond and the futures contract. The approximate number of contracts that Groton needs to appropriately change the duration of the portfolio is closest to: A. 288 B. 314 C. 351 The Answer is retrieved without adjusting for Yield Beta and I must say I do not understand why.

Because rules are meant to be broken. Sorry, I haven’t a clue…

Thats a CFAI question?

Yep, found on the CFAI homepage. Forgot to mention that the Value of portfolio is \$450.000.000

yield beta captures the relation between the CTD bond and the futures contract. I think the above might be incorrect . The yield beta captures the relation b/w the CTD and the Bond to be hedged . The conversion factor capture the relationship b/w the CTD and the futures .

Rudeboi Wrote: ------------------------------------------------------- > yield beta captures the relation between the CTD > bond and the futures contract. > > I think the above might be incorrect . The yield > beta captures the relation b/w the CTD and the > Bond to be hedged . The conversion factor capture > the relationship b/w the CTD and the futures . I think that sentence is correct…

I just checked pg.112 vol 4 . CFAI textbook

This one is really puzzling for me too. If we are not given this yield beta, fine I can come up with the answer myself. But since they offer this info to us and this info is actually useful, how are we supposed to ignore it?

So what’s the solution for this one?

The Answer is A Can see that I gave you too little info… D(Future) = 6.5 D(target) = 6.83 D(Portfolio) = 7.33 Port. Value = 450,000,000 yield beta (not used) = 1.12 Conversion Factor = 0.9177 Future Price = 110,425 It’s the ‘normal’ hedging formula I will assume it was a misstake in the Mock Exam if noone can give an explanation. Thanks for caring

and yes… this is incorrect… actually a separate question "Groton tells the committee that the yield beta captures the relation between the CTD bond and the futures contract. "

The actual formula for change the duration of bond using CTD does not include yield beta: Number of contracts = [(DT – DI) x Pi x Conversion factor for CTD bond] / (DCTD x PCTD) I wonder why if the definition of yield beta is that if captures the relationship bet the CTD bond and futures constract?

Guys, I can’t promise I am right but it makes sense to me when I think about it like this: When interest rates change over time the yield on the bond we want to hedge may react differently than the yield of the CTD bond. Yield beta gives us an indication of this relationship. We need to take this into consideration if we want to hedge. If our bond is going to move more than the hedging instrument we will need more of the hedging instrument. However, this question is not asking about hedging. This question is just saying adjust the duration right now. Who cares if over time the duration drifts away from our target duration. We just want to reach the target duration right now.

Thanks. Still not totally convinced but think it’s a rule to follow for the exam at least. Use Yield beta when spefifically asked to hedge a bond. My objection is this. In the question you are effectively hedging bits of the portfolio with a yield that moves 1.12 times that of the CTD. So even if my Duration is OK there is still the basis difference and without compensating for this, the value of the hedged part of the Portfolio will move more than that of the CTD as the yield changes more… Not sure if I’m making sense but it seems a bit wird not to use Yield beta. Oh well… not the first ‘weird’ thing I have found in the CFAI/Schweser books. Guess it keeps you on your toes.

This one messed me up also. The CFAI text (vol 4., pg. 110) gives the formula without the yield bate in the context of duration management then on page 112 it gives the same formula but with the addition of yield beta in the context of duration hedging ,it then goes on to say that the three major sources of hedging error are: 1) incorrect duration calculation 2) inaccurate projected basis value 3) inaccurate yield beta estimate So I guess I would agree Don’t use yield beta if you are told to change the duration Use yield beta if you are told to hedge the position or implement a duration hedge

yield beta comes up in 2 questions on the mock - so it had me worried. My study pal for L3 is a PM at Pimco and has never heard of it and can’t find it anywhere in Pimco internal resources, and it’s nowhere on the web either. Schweser definitions conflict. Since it came up in the mock they might not put it in the exam. But if they put it on the exam we know what to do (sort of). I started out L3 with high hopes of understanding all the stuff - now it’s just a question of passing the exam…I don’t claim to understand it

I just went through reading 42 from both Schweser and CFAI Schweser uses yield beta for calculation involving modifying portfolio duration using treasury futures and mentions that we should account for yield beta CFAI reading 42 on the other hand has “no” mention of yield beta … no problems in the blue boxes or even the EOC’s involve yield beta… I think we should safely ignore it when changing duration I am glad this came up in the mock

I can think of a reason, the yield beta that we normally talking about measures the relationship between the bond that we hold in the portfolio and the CTD. The trick is in this case yield beta measures a different type of relationship futures and CTD, this relationship has already been captured in the conversion rate, that’s why we should ignore it. does it make sense?

So, to confirm, the yield beta captures the difference between the future and the portfolio and the conversion factor captures the difference between the CTD bond and the future? This topic seems to cause a lot of confusion and was hoping to sort this out