LOS e: Construct and evaluate an immunization strategy based on interest rate futures.

Q1. 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 portfolio’s dollar duration:

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

B)   more than the proposed bond position.

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

Q2. 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 manager’s 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)   -$18,000.

B)   $63,000.

C)   $18,000.

Q3. 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)   decrease dollar duration.

B)   increase modified duration.

C)   increase the value.

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Q1. 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 portfolio’s dollar duration:

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

B)   more than the proposed bond position.

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

Correct answer is A)

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

Q2. 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 manager’s 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)   -$18,000.

B)   $63,000.

C)   $18,000.

Correct answer is B)         

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

Q3. 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)   decrease dollar duration.

B)   increase modified duration.

C)   increase the value.

Correct answer is A)

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 portfolio’s 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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