To manage this interest rate risk, the FI's manager considers using futures contracts. The manager looks at Treasury note futures, where the duration of the Treasury notes underlying the futures contract is 10 years, and these futures are trading at a price of $105.00 per $100 nominal value, with a minimum contract size of $100,000.

• How many Treasury note futures contracts should the financial institution’s manager purchase or sell to hedge the interest rate risk associated with a given position?
• What is the notional value of the futures contracts required to achieve a full hedge, considering the current price of the futures contracts and the duration of the underlying Treasury notes?
• How will changes in the market interest rates affect the value of the futures contracts and the overall hedging strategy?
• What are the potential implications of basis risk in this hedging strategy, and how can the manager minimize it?
• If the interest rates were to rise, what would be the impact on the financial institution’s portfolio, and how effectively would the futures contracts offset this risk?

Answer rating: 100% (QA)

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