market value) U.S. government

  

Security Analysis & Portfolio Mgmnt Chapter 21 Problem 3 page 796 
June Klein, CFA, manages a $100 million (market value) U.S. government bond portfolio for an institution. She anticipates a small parallel shift in the yield curve and wants to fully hedge the portfolio against any such change. Portfolio and Treasury Bond Futures Contract Characteristics Conversion Factor for Portfolio Modified Basis Point Cheapest to Value/Future Security Duration Value Deliver Bond Contract Price Portfolio 10 yrs 100,000 Not applicable 100,000,000 US Treasury 8 yrs $75.32 1 94-05 bond futures contract a. Discuss two reasons for using futures rather than selling bonds to hedge a bond portfolio. No calculations required. b. Formulate Klein’s hedging strategy using only the futures contract shown. Calculate the number of futures contracts to implement the strategy. Show all calculations c. Determine how each of the following would change in value if interest rates increase by 10 basis points as anticipated. Show all calculations. (1) The original portfolio (2) The Treasury bond futures position (3) The newly hedged portfolio. d. State three reasons why Klein’s hedging strategy might not fully protect the portfolio against interest rate risk. e. Describe a zero-duration hedging strategy using only the government bond portfolio and options on U.S. Treasury bond futures contracts. No Calculations required. 
  
Calculate the theoretical price of the futures contract expiring six months from now, using the cost-of-carry model Show your calculations. The total (roundtrip) transaction cost for trading a futures contract is $15.00. 
b. Calculate the lower bound for the price of the futures contract expiring six months from now. Show your calculations.