Reading 29: Fixed Income Portfol....ement - Part II－LOS e interest

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CFA Institute Area 8-11, 13: Asset Valuation
Session 9: Portfolio Management of Global Bonds and Fixed Income Derivatives
Reading 29: Fixed Income Portfolio Management - Part II
LOS e: Construct and evaluate an immunization strategy based on interest rate futures.

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A manager of a fixed-income portfolio sells futures contracts identical to contracts it already owns. With respect to the portfolio under management, the effect of this will be to:

A) increase the value.

B) increase modified duration.

C) decrease dollar duration.

D) decrease the value.

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Answer and Explanation

The only one of the choices we know for sure is that dollar duration will decline. The act of closing a futures contract does not necessarily change a portfolios value one way or another. The modified duration is a weighted average of the durations of the positions and not the dollar durations, it may go up or down.

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A manager buys a position in futures contracts that have a dollar duration (for a forecasted interest rate change) equal to $22,500. Before buying the futures contracts, the managers fixed income portfolio had a dollar duration (for the forecasted interest rate change) equal to $40,500. The dollar duration of the combined position is:

A) $63,000.

B) $18,000.

C) $55,555.

D) -$18,000.

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Answer and Explanation

This is an application of the formula DD_P = DD_{P w/o futures} + DD_{Futures position}

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A portfolio manager is considering increasing the dollar duration of a portfolio by either buying more bonds or buying futures contracts. Having used a reliable model to determine a bond position and a futures position that have equal dollar durations, choosing to add the futures position to the existing portfolio will increase the final portfolios dollar duration:

A) by an amount equal to the proposed bond position.

B) significantly, but less than the proposed bond position.

C) only insignificantly.

D) more than the proposed bond position.

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Answer and Explanation

Theoretically, using bonds or futures can accomplish the same goal.