CHAPTER 6

Interest Rate Futures

Practice Questions
Problem 6.1.
A U.S. Treasury bond pays a 7% coupon on January 7 and July 7. How much interest accrues
per $100 o principal to the bond holder between July 7! "011 and Au#ust $! "011% How
would your answer be dierent i it were a corporate bond%
There are 33 calendar days between July 7, 2011 and August 9, 2011. There are 184 calendar
days between July 7, 2011 and January 7, 2011. The interest earned per 100 !" principal is
there"!re 3 # 33 184 0 $277 $ . / . . %!r a c!rp!rate b!nd we assu&e 32 days between July 7
and August 9, 2011 and 180 days between July 7, 2011 and January 7, 2011. The interest
earned is 3 # 32 180 0 $222 $ . / . .
Problem 6.2.
&t is January $! "01'. The price o a Treasury bond with a 1"% coupon that matures on
(ctober 1"! "0"0! is )uoted as 10"*07. +hat is the cash price%
There are 89 days between 'ct!ber 12, 2012, and January 9, 2013. There are 182 days
between 'ct!ber 12, 2012, and April 12, 2013. The cash price !" the b!nd is !btained by
adding the accrued interest t! the (u!ted price. The (u!ted price is
7
32
102
!r 102.2187#. The
cash price is there"!re
89
102 2187# $ 10# 1#
182
. + .
Problem 6.3.
How is the con,ersion actor o a bond calculated by the -./ 0roup% How is it used%
The c!n)ersi!n "act!r "!r a b!nd is e(ual t! the (u!ted price the b!nd w!uld ha)e per d!llar
!" principal !n the "irst day !" the deli)ery &!nth !n the assu&pti!n that the interest rate "!r
all &aturities e(uals $* per annu& +with se&iannual c!&p!unding,. The b!nd &aturity and
the ti&es t! the c!up!n pay&ent dates are r!unded d!wn t! the nearest three &!nths "!r the
purp!ses !" the calculati!n. The c!n)ersi!n "act!r de"ines h!w &uch an in)est!r with a sh!rt
b!nd "utures c!ntract recei)es when b!nds are deli)ered. -" the c!n)ersi!n "act!r is 1.234#
the a&!unt in)est!r recei)es is calculated by &ultiplying 1.234# by the &!st recent "utures
price and adding accrued interest.
Problem 6.4.
A /urodollar utures price chan#es rom $1.71 to $1.2". +hat is the #ain or loss to an
in,estor who is lon# two contracts%
The .ur!d!llar "utures price has increased by $ basis p!ints. The in)est!r &a/es a gain per
c!ntract !" 2# $ 1#0 !r 300 in t!tal.
Problem 6.5.
+hat is the purpose o the con,e3ity ad4ustment made to /urodollar utures rates% +hy is the
con,e3ity ad4ustment necessary%
0upp!se that a .ur!d!llar "utures (u!te is 9#.00. This gi)es a "utures rate !" #* "!r the three1
&!nth peri!d c!)ered by the c!ntract. The c!n)e2ity ad3ust&ent is the a&!unt by which
"utures rate has t! be reduced t! gi)e an esti&ate !" the "!rward rate "!r the peri!d. The
c!n)e2ity ad3ust&ent is necessary because a, the "utures c!ntract is settled daily and b, the
"utures c!ntract e2pires at the beginning !" the three &!nths. 4!th !" these lead t! the "utures
rate being greater than the "!rward rate.
Problem 6.6.
The '50*day 6&7(8 rate is '% with continuous compoundin# and the orward rate
calculated rom a /urodollar utures contract that matures in '50 days is '."% with
continuous compoundin#. /stimate the 990*day :ero rate.
%r!& e(uati!n +$.4, the rate is
3 2 90 3 3#0
3 0409
440
. +
.
!r 3.0409*.
Problem 6..
&t is January '0. ;ou are mana#in# a bond portolio worth $1 million. The duration o the
portolio in si3 months will be 2." years. The September Treasury bond utures price is
currently 102*15! and the cheapest*to*deli,er bond will ha,e a duration o 7.1 years in
September. How should you hed#e a#ainst chan#es in interest rates o,er the ne3t si3 months%
The )alue !" a c!ntract is
1#
32
108 1 000 108 4$8 7# $ , , .
. The nu&ber !" c!ntracts that sh!uld
be sh!rted is
$ 000 000 8 2
#9 7
108 4$8 7# 7 $
, , .
.
, . .
5!unding t! the nearest wh!le nu&ber, $0 c!ntracts sh!uld be sh!rted. The p!siti!n sh!uld
be cl!sed !ut at the end !" July.
Problem 6.!.
The price o a $0*day Treasury bill is )uoted as 10.00. +hat continuously compounded
return <on an actual='15 basis> does an in,estor earn on the Treasury bill or the $0*day
period%
The cash price !" the Treasury bill is
90
100 10 97 #0
3$0
$ .
The annuali6ed c!ntinu!usly c!&p!unded return is
3$# 2 #
ln 1 10 27
90 97 #
%
. _
+ .

.
,
Problem 6.".
&t is .ay 5! "011. The )uoted price o a #o,ernment bond with a 1"% coupon that matures on
July "7! "019! is 110*17. +hat is the cash price%
The nu&ber !" days between January 27, 2011 and 7ay #, 2011 is 98. The nu&ber !" days
between January 27, 2011 and July 27, 2011 is 181. The accrued interest is there"!re
98
$ 3 248$
181
.
The (u!ted price is 110.#312. The cash price is there"!re
110 #312 3 248$ 113 7798 . + . .
!r 113.78.
Problem 6.1#.
Suppose that the Treasury bond utures price is 101*1". +hich o the ollowin# our bonds is
cheapest to deli,er%
7ond ?rice -on,ersion @actor
1 1"5*05 1."1'1
" 19"*15 1.'7$"
' 115*'1 1.119$
9 199*0" 1.90"1
The cheapest1t!1deli)er b!nd is the !ne "!r which
8u!ted 9rice %utures 9rice :!n)ersi!n %act!r
is least. :alculating this "act!r "!r each !" the 4 b!nds we get
4!nd1 12# 1#$2# 101 37# 1 2131 2 178
4!nd 2 142 4$87# 101 37# 1 3792 2 $#2
4!nd 3 11# 9$87# 101 37# 1 1149 2 94$
4!nd 4 144 0$2#0 101 37# 1 402$ 1 874
: . . . .
: . . . .
: . . . .
: . . . .
4!nd 4 is there"!re the cheapest t! deli)er.
Problem 6.11.
&t is July '0! "01'. The cheapest*to*deli,er bond in a September "01' Treasury bond utures
contract is a 1'% coupon bond! and deli,ery is e3pected to be made on September '0! "01'.
-oupon payments on the bond are made on @ebruary 9 and Au#ust 9 each year. The term
structure is lat! and the rate o interest with semiannual compoundin# is 1"% per annum.
The con,ersion actor or the bond is 1.5. The current )uoted bond price is $110. -alculate
the )uoted utures price or the contract.
There are 17$ days between %ebruary 4 and July 30 and 181 days between %ebruary 4 and
August 4. The cash price !" the b!nd is, there"!re;
17$
110 $ # 11$ 32
181
+ . .
The rate !" interest with c!ntinu!us c!&p!unding is 2ln1 0$ 0 11$# . . !r 11.$#* per annu&.
A c!up!n !" $.# will be recei)ed in # days
+ 0 013$$ .
years, ti&e. The present )alue !" the
c!up!n is
0 013$$ 0 11$#
$ # $ 490 e
. .
. .
The "utures c!ntract lasts "!r $2 days
+ 0 1$94 .
years,. The cash "utures price i" the c!ntract
were written !n the 13* b!nd w!uld be
0 1$94 0 11$#
+11$ 32 $ 490, 112 02 e
. .
. . .
At deli)ery there are #7 days !" accrued interest. The (u!ted "utures price i" the c!ntract were
written !n the 13* b!nd w!uld there"!re be
#7
112 02 $ # 110 01
184
. . .
Ta/ing the c!n)ersi!n "act!r int! acc!unt the (u!ted "utures price sh!uld be;
110 01
73 34
1 #
.
.
.
Problem 6.12.
An in,estor is looAin# or arbitra#e opportunities in the Treasury bond utures marAet. +hat
complications are created by the act that the party with a short position can choose to
deli,er any bond with a maturity o o,er 15 years%
-" the b!nd t! be deli)ered and the ti&e !" deli)ery were /n!wn, arbitrage w!uld be
straight"!rward. <hen the "utures price is t!! high, the arbitrageur buys b!nds and sh!rts an
e(ui)alent nu&ber !" b!nd "utures c!ntracts. <hen the "utures price is t!! l!w, the
arbitrageur sh!rts b!nds and g!es l!ng an e(ui)alent nu&ber !" b!nd "utures c!ntracts.
=ncertainty as t! which b!nd will be deli)ered intr!duces c!&plicati!ns. The b!nd that
appears cheapest1t!1deli)er n!w &ay n!t in "act be cheapest1t!1deli)er at &aturity. -n the
case where the "utures price is t!! high, this is n!t a &a3!r pr!ble& since the party with the
sh!rt p!siti!n +i.e., the arbitrageur, deter&ines which b!nd is t! be deli)ered. -n the case
where the "utures price is t!! l!w, the arbitrageur>s p!siti!n is "ar &!re di""icult since he !r
she d!es n!t /n!w which b!nd t! sh!rt? it is unli/ely that a pr!"it can be l!c/ed in "!r all
p!ssible !utc!&es.
Problem 6.13.
Suppose that the nine*month 6&7(8 interest rate is 2% per annum and the si3*month 6&7(8
interest rate is 7.5% per annum <both with actual='15 and continuous compoundin#>.
/stimate the three*month /urodollar utures price )uote or a contract maturin# in si3
months.
The "!rward interest rate "!r the ti&e peri!d between &!nths $ and 9 is 9* per annu& with
c!ntinu!us c!&p!unding. This is because 9* per annu& "!r three &!nths when c!&bined
with 7
1
2
* per annu& "!r si2 &!nths gi)es an a)erage interest rate !" 8* per annu& "!r the
nine1&!nth peri!d.
<ith (uarterly c!&p!unding the "!rward interest rate is
0 09 4
4+ 1, 0 09102 e
. /
.
!r 9.102*. This assu&es that the day c!unt is actual@actual. <ith a day c!unt !" actual@3$0
the rate is 9 102 3$0 3$# 8 977 . / . . The three1&!nth .ur!d!llar (u!te "!r a c!ntract
&aturing in si2 &!nths is there"!re
100 8 977 91 02 . .
Problem 6.14.
Suppose that the '00*day 6&7(8 :ero rate is 9% and /urodollar )uotes or contracts
maturin# in '00! '$2 and 92$ days are $5.2'! $5.1"! and $5.92. -alculate '$2*day and 92$*
day 6&7(8 :ero rates. Assume no dierence between orward and utures rates or the
purposes o your calculations.
The "!rward rates calculated "!r& the "irst tw! .ur!d!llar "utures are 4.17* and 4.38*.
These are e2pressed with an actual@3$0 day c!unt and (uarterly c!&p!unding. <ith
c!ntinu!us c!&p!unding and an actual@3$# day c!unt they are
+3$#@90,ln+1A0.0417@4,B4.20$0* and +3$#@90,ln+1A0.0438@4,B 4.41$7*. -t "!ll!ws "r!&
e(uati!n +$.4, that the 398 day rate is
+4C300A4.20$0C98,@398B4.0#07
!r 4.0#07*. The 489 day rate is
+4.0#07C398A4.41$7C 91,@489B4.1188
!r 4.1188*. <e are assu&ing that the "irst "utures rate applies t! 98 days rather than the usual
91 days. The third "utures (u!te is n!t needed.
Problem 6.15.
Suppose that a bond portolio with a duration o 1" years is hed#ed usin# a utures contract
in which the underlyin# asset has a duration o our years. +hat is liAely to be the impact on
the hed#e o the act that the 1"*year rate is less ,olatile than the our*year rate%
Durati!n1based hedging pr!cedures assu&e parallel shi"ts in the yield cur)e. 0ince the 121
year rate tends t! &!)e by less than the 41year rate, the p!rt"!li! &anager &ay "ind that he !r
she is !)er1hedged.
Problem 6.16.
Suppose that it is @ebruary "0 and a treasurer reali:es that on July 17 the company will ha,e
to issue $5 million o commercial paper with a maturity o 120 days. & the paper were issued
today! the company would reali:e $9!2"0!000. <&n other words! the company would recei,e
$9!2"0!000 or its paper and ha,e to redeem it at $5!000!000 in 120 daysB time.> The
September /urodollar utures price is )uoted as $".00. How should the treasurer hed#e the
companyBs e3posure%
The c!&pany treasurer can hedge the c!&pany>s e2p!sure by sh!rting .ur!d!llar "utures
c!ntracts. The .ur!d!llar "utures p!siti!n leads t! a pr!"it i" rates rise and a l!ss i" they "all.
The durati!n !" the c!&&ercial paper is twice that !" the .ur!d!llar dep!sit underlying the
.ur!d!llar "utures c!ntract. The c!ntract price !" a .ur!d!llar "utures c!ntract is 980,000.
The nu&ber !" c!ntracts that sh!uld be sh!rted is, there"!re,
4 820 000
2 9 84
980 000
, ,
.
,
5!unding t! the nearest wh!le nu&ber 10 c!ntracts sh!uld be sh!rted.
Problem 6.1.
(n Au#ust 1 a portolio mana#er has a bond portolio worth $10 million. The duration o the
portolio in (ctober will be 7.1 years. The Cecember Treasury bond utures price is currently
$1*1" and the cheapest*to*deli,er bond will ha,e a duration o 2.2 years at maturity. How
should the portolio mana#er immuni:e the portolio a#ainst chan#es in interest rates o,er
the ne3t two months%
The treasurer sh!uld sh!rt Treasury b!nd "utures c!ntract. -" b!nd prices g! d!wn, this
"utures p!siti!n will pr!)ide !""setting gains. The nu&ber !" c!ntracts that sh!uld be sh!rted
is
10 000 000 7 1
88 30
91 37# 8 8
, , .
.
, .
5!unding t! the nearest wh!le nu&ber 88 c!ntracts sh!uld be sh!rted.
Problem 6.1!.
How can the portolio mana#er chan#e the duration o the portolio to '.0 years in ?roblem
1.17%
The answer in 9r!ble& $.17 is designed t! reduce the durati!n t! 6er!. T! reduce the durati!n
"r!& 7.1 t! 3.0 instead !" "r!& 7.1 t! 0, the treasurer sh!uld sh!rt
4 1
88 30 #0 99
7 1
.
. .
.
!r #1 c!ntracts.
Problem 6.1".
7etween (ctober '0! "01"! and Do,ember 1! "01"! you ha,e a choice between ownin# a U.S.
#o,ernment bond payin# a 1"% coupon and a U.S. corporate bond payin# a 1"% coupon.
-onsider careully the day count con,entions discussed in this chapter and decide which o
the two bonds you would preer to own. &#nore the risA o deault.
E!u w!uld pre"er t! !wn the Treasury b!nd. =nder the 30@3$0 day c!unt c!n)enti!n there is
!ne day between 'ct!ber 30 and F!)e&ber 1. =nder the actual@actual +in peri!d, day c!unt
c!n)enti!n, there are tw! days. There"!re y!u w!uld earn appr!2i&ately twice as &uch
interest by h!lding the Treasury b!nd.
Problem 6.2#.
Suppose that a /urodollar utures )uote is 22 or a contract maturin# in 10 days. +hat is the
6&7(8 orward rate or the 10* to 150*day period% &#nore the dierence between utures and
orwards or the purposes o this )uestion.
The .ur!d!llar "utures c!ntract price !" 88 &eans that the .ur!d!llar "utures rate is 12* per
annu& with (uarterly c!&p!unding. This is the "!rward rate "!r the $01 t! 1#01day peri!d
with (uarterly c!&p!unding and an actual@3$0 day c!unt c!n)enti!n.
Problem 6.21.
The three*month /urodollar utures price or a contract maturin# in si3 years is )uoted as
$5."0. The standard de,iation o the chan#e in the short*term interest rate in one year is
1.1%. /stimate the orward 6&7(8 interest rate or the period between 1.00 and 1."5 years
in the uture.
=sing the n!tati!n !" 0ecti!n $.3, 0 011 . ,
1
$ t
, and
2
$ 2# t .
. The c!n)e2ity ad3ust&ent
is
2
1
0 011 $ $ 2# 0 0022$9
2
. . .
!r ab!ut 23 basis p!ints. The "utures rate is 4.8* with (uarterly c!&p!unding and an
actual@3$0 day c!unt. This bec!&es 4 8 3$# 3$0 4 8$7% . / . with an actual@actual day c!unt.
-t is
4ln+1 048$7 4, 4 84% +. / .
with c!ntinu!us c!&p!unding. The "!rward rate is there"!re
4 84 0 23 4 $1% . . . with c!ntinu!us c!&p!unding.
Problem 6.22.
/3plain why the orward interest rate is less than the correspondin# utures interest rate
calculated rom a /urodollar utures contract.
0upp!se that the c!ntracts apply t! the interest rate between ti&es
1
T
and
2
T
. There are tw!
reas!ns "!r a di""erence between the "!rward rate and the "utures rate. The "irst is that the
"utures c!ntract is settled daily whereas the "!rward c!ntract is settled !nce at ti&e
2
T
. The
sec!nd is that with!ut daily settle&ent a "utures c!ntract w!uld be settled at ti&e
1
T
n!t
2
T
.
4!th reas!ns tend t! &a/e the "utures rate greater than the "!rward rate.
Furt$er Questions
Problem 6.23
The Cecember /urodollar utures contract is )uoted as $2.90 and a company plans to
borrow $2 million or three months startin# in Cecember at 6&7(8 plus 0.5%.
<a> +hat rate can then company locA in by usin# the /urodollar utures contract%
<b> +hat position should the company taAe in the contracts%
<c> & the actual three*month rate turns out to be 1.'%! what is the inal settlement price on
the utures contracts.
&#nore timin# mismatches between the cash lows rom the /urodollar utures contract and
interest rate cash lows.
+a, The c!&pany can l!c/ in a 31&!nth rate !" 100 G 98.4 B1.$0*. The rate it pays is
there"!re l!c/ed in at 1.$ A 0.# B 2.1*.
+b, The c!&pany sh!uld sell +i.e., sh!rt, 8 c!ntracts. -" rates increase, the "utures (u!te g!es
d!wn and the c!&pany gains !n the "utures. 0i&ilarly, i" rates decrease, the "utures (u!te
g!es up and the c!&pany l!ses !n the "utures.
+c, The "inal settle&ent price is 100 G 1.30 B 98.70.
Problem 6.24
A /urodollar utures )uote or the period between 5.1 and 5.'5 year in the uture is $7.1. The
standard de,iation o the chan#e in the short*term interest rate in one year is 1.9%. /stimate
the orward interest rate in an @8A.
The "utures rate is 2.9*. The "!rward rate can be esti&ated using e(uati!n +$.3, as
0.029 G 0.#C 0.014
2
C#.1C#.3# B 0.02$3
!r 2.$3*.
Problem 6.25
&t is .arch 10! "011. The cheapest*to*deli,er bond in a Cecember "011 Treasury bond
utures contract is an 2% coupon bond! and deli,ery is e3pected to be made on Cecember '1
'1! "011. -oupon payments on the bond are made on .arch 1 and September 1 each year.
The term structure is lat! and the rate o interest with continuous compoundin# is 5% per
annum. The con,ersion actor or the bond is 1."1$1. The current )uoted bond price is $1'7.
-alculate the )uoted utures price or the contract.
The cash b!nd price is currently
19#7 . 137 4
184
9
137 +
A c!up!n !" 4 will be recei)ed a"ter 17# days !r 0.479# years. The present )alue !" the
c!up!n !n the b!nd is 4e
10.0#C0.479#
B3.90#3. The "utures c!ntract lasts 29$ days !r 0.8110 years.
The cash "utures price i" it were written !n the 8* b!nd w!uld there"!re be
+137.19#7 3.90#3,e
0.0#C0.8110
B138.80$1
At deli)ery there are 121 days !" accrued interest. The (u!ted "utures i" the c!ntract were
written !n the 8* b!nd w!uld there"!re be
14$8 . 13$
182
121
4 80$1 . 138
The (u!ted price sh!uld there"!re be
$8 . 111
2191 . 1
14$8 . 13$

Problem 6.26.
Assume that a banA can borrow or lend money at the same interest rate in the 6&7(8 marAet.
The $0*day rate is 10% per annum! and the 120*day rate is 10."% per annum! both
e3pressed with continuous compoundin#. The /urodollar utures price or a contract
maturin# in $1 days is )uoted as 2$.5. +hat arbitra#e opportunities are open to the banA%
The .ur!d!llar "utures c!ntract price !" 89.# &eans that the .ur!d!llar "utures rate is 10.#*
per annu& with (uarterly c!&p!unding and an actual@3$0 day c!unt. This bec!&es
10 # 3$# 3$0 10 $4$% . / . with an actual@actual day c!unt. This is
4ln+1 0 2# 0 10$4$, 0 10#1 + . . .
!r 10.#1* with c!ntinu!us c!&p!unding. The "!rward rate gi)en by the 901day rate and the
1801day rate is 10.4* with c!ntinu!us c!&p!unding. This suggests the "!ll!wing arbitrage
!pp!rtunity;
1. 4uy .ur!d!llar "utures.
2. 4!rr!w 1801day &!ney.
3. -n)est the b!rr!wed &!ney "!r 90 days.
Problem 6.2.
A -anadian company wishes to create a -anadian 6&7(8 utures contract rom a U.S.
/urodollar utures contract and orward contracts on orei#n e3chan#e. Usin# an e3ample!
e3plain how the company should proceed. @or the purposes o this problem! assume that a
utures contract is the same as a orward contract.

The =.0. .ur!d!llar "utures c!ntract &aturing at ti&e T enables an in)est!r t! l!c/ in the
"!rward rate "!r the peri!d between T and
T

where
T

is three &!nths later than T . -" H r is

the "!rward rate, the =.0. d!llar cash "l!ws that can be l!c/ed in are
H+ ,
at ti&e
at ti&e
r T T
Ae T
A T

+
where A is the principal a&!unt. T! c!n)ert these t! :anadian d!llar cash "l!ws, the
:anadian c!&pany &ust enter int! a sh!rt "!rward "!reign e2change c!ntract t! sell
:anadian d!llars at ti&e T and a l!ng "!rward "!reign e2change c!ntract t! buy :anadian
d!llars at ti&e
T

. 0upp!se @ and
@

are the "!rward e2change rates "!r c!ntracts &aturing

at ti&es T and
T

. +These represent the nu&ber !" :anadian d!llars per =.0. d!llar., The
:anadian d!llars t! be s!ld at ti&e T are
H+ , r T T
Ae @

and the :anadian d!llars t! be purchased at ti&e
T

are
A@

The "!rward c!ntracts c!n)ert the =.0. d!llar cash "l!ws t! the "!ll!wing :anadian d!llar
cash "l!ws;
H+ ,
at ti&e
at ti&e
r T T
Ae @ T
A@ T

+
This is a :anadian d!llar I-4'5 "utures c!ntract where the principal a&!unt is
A@

.
Problem 6.2!.
The utures price or the June "011 bond utures contract is 112*"'.
a. -alculate the con,ersion actor or a bond maturin# on January 1! "0"7! payin# a
coupon o 10%.
b. -alculate the con,ersion actor or a bond maturin# on (ctober 1! "0'"! payin#
coupon o 7%.
c.Suppose that the )uoted prices o the bonds in <a> and <b> are 11$.00 and 1'1.00!
respecti,ely. +hich bond is cheaper to deli,er%
d. Assumin# that the cheapest to deli,er bond is actually deli,ered on June "5! "011!
what is the cash price recei,ed or the bond%
a, 'n the "irst day !" the deli)ery &!nth the b!nd has 1# years and 7 &!nths t! &aturity.
The )alue !" the b!nd assu&ing it lasts 1#.# years and all rates are $* per annu&
with se&iannual c!&p!unding is
31
31
1
# 100
140 00
1 03 1 03
i
i
+ .
. .

The c!n)ersi!n "act!r is there"!re 1.4000.

b, 'n the "irst day !" the deli)ery &!nth the b!nd has 21 years and 4 &!nths t! &aturity.
The )alue !" the b!nd assu&ing it lasts 21.2# years and all rates are $* per annu&
with se&iannual c!&p!unding is
42
42
1
1 3 # 100
3 # 113 $$
1 03 1 03 1 03
i
i
. 1
. + + .
1
. . .
]

0ubtracting the accrued interest !" 1.7#, this bec!&es 111.91. The c!n)ersi!n "act!r is
there"!re 1.1191.
c, %!r the "irst b!nd, the (u!ted "utures price ti&es the c!n)ersi!n "act!r is
118.7187#C1.4000 B 1$$.20$3
This is 2.7938 less than the (u!ted b!nd price. %!r the sec!nd b!nd, the (u!ted
"utures price ti&es the c!n)ersi!n "act!r is
118.7187#C1.1191 B 132.8#7$
This is 3.1418 less than the (u!ted b!nd price. The "irst b!nd is there"!re the cheapest
t! deli)er.
d, The price recei)ed "!r the b!nd is 1$$.20$3 plus accrued interest. There are 17# days
between January 1, 2010 and June 2#, 2010. There are 181 days between January 1,
2010 and July 1, 2010. The accrued interest is there"!re
8343 . 4
181
17#
#
The cash price recei)ed "!r the b!nd is there"!re 171.040$.
Problem 6.2"
A portolio mana#er plans to use a Treasury bond utures contract to hed#e a bond portolio
o,er the ne3t three months. The portolio is worth $100 million and will ha,e a duration o
9.0 years in three months. The utures price is 1""! and each utures contract is on $100!000
o bonds. The bond that is e3pected to be cheapest to deli,er will ha,e a duration o $.0 years
at the maturity o the utures contract. +hat position in utures contracts is re)uired%
a. +hat ad4ustments to the hed#e are necessary i ater one month the bond that is e3pected
to be cheapest to deli,er chan#es to one with a duration o se,en years%
b. Suppose that all rates increase o,er the three months! but lon#*term rates increase less
than short*term and medium*term rates. +hat is the eect o this on the perormance o
the hed#e%
The nu&ber !" sh!rt "utures c!ntracts re(uired is
100 000 000 4 0
3$4 3
122 000 9 0
, , .
.
, .
5!unding t! the nearest wh!le nu&ber 3$4 c!ntracts sh!uld be sh!rted.
a. This increases the nu&ber !" c!ntracts that sh!uld be sh!rted t!
100 000 000 4 0
4$8 4
122 000 7 0
, , .
.
, .
!r 4$8 when we r!und t! the nearest wh!le nu&ber.
b. -n this case the gain !n the sh!rt "utures p!siti!n is li/ely t! be less than the l!ss !n
the l!ss !n the b!nd p!rt"!li!. This is because the gain !n the sh!rt "utures p!siti!n
depends !n the si6e !" the &!)e&ent in l!ng1ter& rates and the l!ss !n the b!nd
p!rt"!li! depends !n the si6e !" the &!)e&ent in &ediu&1ter& rates. Durati!n1based
hedging assu&es that the &!)e&ents in the tw! rates are the sa&e.