Mr. Madoff is a portfolio manager who is responsible for a $350 million portion of the
bond portfolio of Affluent.com’s pension fund. The current investment guidelines
specify that the duration for the portfolio can be in a range of minus one and plus one of
the duration benchmark. Currently, the duration benchmark is 3.2 and the duration for
the portfolio is 4.0. Mr. Madoff expects that rates will rise. He wants to reduce the
duration of the portfolio to the lower end of the duration benchmark’s range, 3, by
using Treasury bond futures contracts, which he is authorized to use by the pension
fund’s investment guidelines.
a. What position (long or short) should Mr. Madoff take in Treasury bond
futures to reduce the duration from 5 to 3? b. Suppose that the dollar duration per Treasury bond futures contract (based on
the cheapest-to-deliver issue) for a 25 basis point change in rates is $2,400. How
many Treasury bond futures contracts must be bought or sold?