The following excerpt appeared in the following article, “Duration,” in the November 16, 1992, issue of Derivatives Week, p. 9:
“TSA Capital Management in Los Angeles must determine duration of the futures contract it uses in order to match it with the dollar duration of the underlying, explains David Depew, principal and head of trading at the firm. Futures duration will be based on the duration of the underlying bond most likely to be delivered against the contract .”
Answer the below questions.
(a) Explain why it is necessary to know the dollar duration of the underlying in order to hedge.
(b) Why can the price value of basis point be used instead of the dollar duration?