Duration for futures calculation. modify, choice, assets, average, multiple

adehbone

Portfolio consists of 200MM in assets with duration of 6 and 100MM in liabilities with 1 duration. Equity duration thus 11.

Question asks to modify duration to 4.

Formula used is (4 - 6)(200M) / (Futures Information on Bottom Which I Can't Remember).

Why not use 4 - 5.5 (net average asset duration when considering 100MM liabilities with 1 year duration). Hedging with duration of 6 would overhedge portfolio and cause portfolio duration to be <4. Question was multiple choice so I did get it right by the entire question is poor from a theory basis.

100MM in assets has a 6 duration, while the remaining 100MM is net 5. Invested in assets with 6 duration but having liability of 1 year liability attached to assets decreases duration to 5 or 5.25 if you use the 75& rule.



Edited 2 time(s). Last edit at Tuesday, May 17, 2011 at 10:14AM by Paraguay.

Windjam

Should be the 75% rule.

mcmc

not a good question...i think they are just trying to make a simple formula more difficult for people to miss it...just like the formula for currency contribution in international diversification...so simple,yet when asked in a problem set its the most likely to miss it

thommo77

superstar123 Wrote:
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> not a good question...i think they are just trying
> to make a simple formula more difficult for people
> to miss it...just like the formula for currency
> contribution in international diversification...so
> simple,yet when asked in a problem set its the
> most likely to miss it

Yeah standard deviation must always be in the same currency. I can see that being on the PM exam.

The whole thing is this question is frankly just wrong. Using 6 as the duration has decreased portfolio duration below 4.



Edited 2 time(s). Last edit at Tuesday, May 17, 2011 at 10:32AM by Paraguay.