When hedging a bond portfolio with futures contracts it is vital to know the BPV of the
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Question:
When hedging a bond portfolio with futures contracts it is vital to know the BPV of the portfolio. Explain what is meant by the BPV and how this can be calculated. Secondly, by citing a specific example show why the price/yield relationship of bonds is subject to convexity and why the calculation of the BPV of a bond is dependent on convexity. Thirdly, provide a detailed example of how an asset manager could hedge a bond portfolio by using either US Treasury bond or German bund futures contracts. Fourthly, discuss what is meant by basis risk when using futures contracts.
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