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Trick Question: Volatility of Bond

If the volatility of the bond to be hedged is high, more futures contract is needed to hedge it (Beta > 1).

What if the volatility of the underlying of the futures is high? Would more contracts, or less contracts be needed to hedge the bond?

Volatility isn't a criteria when hedging using futures. I know where this question came from.

NO EXCUSES

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If by volatility, you mean duration, then more futures are needed to offset a longer duration bond.

Less futures are needed to hedge if the futures (or CTD bond) have a longer duration

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I remember once of the Schweser question has it that if your CTD is volatile, more will be needed to hedge. Today I do the sample question it states if the bond you want to hedge is volatile, then you need to increase the contracts to hedge it...

UGH

Can someone explain the logic?

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It is only applicable in cross-hedge where future's underlying might be exposed to different risk factors than the bond being hedged

hedge ratio =exposure of bond to risk factor / exposure of futures to risk factor


So if you determined the number of futures needed to hedge the bond is 100 based on the original DD formula

then you need = 100 * hedge Ratio

So if bond is risky than the future, hedge ratio will be greater than 1 and you need more futures

This is from Schweser

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THATS RIGHT. I remember now. Slipped out of my tiny head. Thanks Sanjcfa!

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