As of 09/09/2011, a fixed income manager owns the following portfolio of German government bonds: 1) 400,000
Question:
As of 09/09/2011, a fixed income manager owns the following portfolio of German government bonds:
1) 400,000 nominal of the bond OBL: Coupon 2.50%, Maturity 10/10/2014, that is listed with an Ex-Coupon Price of 105.50, with Modified Duration 2.52
2) 500,000 nominal bond OBL: Coupon 2.75%, Expiration 04/04/2016, that trades with an Ex-Coupon Price of 107.70, with Modified Duration 4.66
- 3) 300,000 nominal bond OBL: Coupon 2.25%, Expiration 09/04/2021, that is listed with an Ex-Coupon Price of 103.00, with Modified Duration 9.17
Faced with the expectation of rising interest rates, it is considering the use of financial futures on German debt to protect its portfolio. The futures available in the fixed income market are:
1) Future on the 2-year SCHATZ bond, whose deliverable bond has a modified duration of 1.99
2) Future on the 5-year BOBL bond, whose deliverable bond has a modified duration of 5.05
3) Future on the 10-year BUND bond, whose deliverable bond has a modified duration of 8.58 Determine what position you should adopt in financial futures given your expectation of interest rates and which of these futures you should use in your operations.
Determine what position you should adopt in the financial futures given your expectation of interest rates and which of these futures you should use in your operations.