Joe Cummings is the fixed income manager of a large Canadian pension fund. The present value of

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Question:

Joe Cummings is the fixed income manager of a large Canadian pension fund. The present value of the pension fund’s portfolio of assets is CAD 4 billion while the expected present value of the fund’s liabilities is CAD 5 billion. The respective modified durations are 9.254 and 6.825 years. The fund currently has an actuarial deficit (assets < liabilities) and Joe must avoid widening this gap. There are currently two scenarios for the yield curve: The first scenario is a downward shift of 25bp, with the second scenario an upward shift of 25bp. The most liquid interest rate futures contract has a present value of CAD 68,336 and a duration of 2.1468 years. Analyzing both scenarios separately, what should Joe do to avoid widening the pension fund gap? Choose the best answer.

Scenario 1 Scenario 2

(a) Short futures Long futures
(b) Long futures Short futures
(c) Short futures Short futures
(d) Long futures Long futures