Problem 1.7. A portfolio manager plans to use a Treasury bond futures contract to hedge a bond portfolio over the next four months. The portfolio is worth $23 million and will have a duration of 8.8 years in five months. The futures price is 127, and each futures contract is on $100,000 of bonds. The bond that is expected to be cheapest to deliver will have a duration of 19 years at the maturity of the futures contract. 2 (a) What position in futures contracts is required? (b) Suppose that all rates decrease over the four months, but long-term rates decrease less than short-term and medium-term rates. What is the effect of this on the performance of the hedge? Problem 1.7. A portfolio manager plans to use a Treasury bond futures contract to hedge a bond portfolio over the next four months. The portfolio is worth $23 million and will have a duration of 8.8 years in five months. The futures price is 127, and each futures contract is on $100,000 of bonds. The bond that is expected to be cheapest to deliver will have a duration of 19 years at the maturity of the futures contract. 2 (a) What position in futures contracts is required? (b) Suppose that all rates decrease over the four months, but long-term rates decrease less than short-term and medium-term rates. What is the effect of this on the performance of the hedge